Subprime's Indian Connection
While Manmohan government is facing a threat, the stock markets were pouring over US home loan defaults. This is a little bit like a cancer patient obsessing over a running nose
By Dhirendra Kumar | Aug 20, 2007
While the Manmohan Singh government is facing a huge threat to its existence, or even worse, its ability to govern effectively, the stock markets were obsessing over the problems of American home loan lenders and borrowers. This is a little bit like a cancer patient obsessing over a runny nose. Or is it? Every morning, when you pick up the newspapers or switch on a news channel, there is a wide choice of news items to pick from. Some are obviously more important than others and some, one assumes, are more of the kind that can have only short-term affect, if at all. But that's something that's generally true of all news. However, when it comes to looking at news from an investment analyst's point of view, I have a deep and long-held belief in the non-newsiness of news. As I wrote in another context a few weeks ago, news, by definition, is something unusual, something that hardly ever happens.
It is clear that there is no direct connection between the subprime mess and India. The fact that there's a run of sorts on Countrywide Financial's bank in the US doesn't have much to do with the Indian end of Countrywide's business. As I said last week, the only tenable connection between themes in America and the Indian stock markets is that investors in the US will turn averse to all kinds of risk and the enormous flow of foreign funds into India will stop or even reverse. What kind of impact would this have on the stocks here? Like most questions about the stock markets, the long term and the short-term answers to this question are different. It is a basic fact of the stock market (or any market) that no matter how wonderful the traded good, its price will languish if there are no buyers. Great things are happening to our country's economy and businesses but for these things to reflect in stock prices, there has to be money flowing into the markets that is willing to buy into the future. Are the foreign investors the only people buying Indian stocks? Not by a long shot, but stock prices are very sensitive to what the last buyer or seller in the market is doing. In a manner of speaking, the price is decided by the 'pressure', upwards or downwards, created by the last unsatisfied buyer or seller in the market. The weighty presence of large foreign inflows for the last few years has been the biggest source of upwards pressure in the markets.
It is entirely possible that this will disappear from the Indian stock markets for some time. This could be for any period of time from day to weeks to months. Since short-term price movements are driven by expectation of short-term price movements, this could lead to a considerable period during which the stock markets languish or even fall. I don't think there's anything much wrong with this as long as the real economy is fine. Companies are making more products and selling them. People are earning more money and spending it. The growth is real and deep. If the stock markets hang around for a while without going anywhere much, then that's that much more of a buying opportunity for those who have faith and are interested in the long-term.
This means that even though the impact of the so-called subprime mess could turn out to be important for a certain period of time, its eventual impact is less important than many other things that you'll read in newspapers.