Published on Sunday, August 30, 2015
Chinese Crisis: 3 Questions for NRI’s
M.R. Raghu


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Sensex fell by 1,624 points (5.94%) on August 24, 2015 to reach 25,741 in what is now termed as Black Monday. That was unprecedented given the normal movement of say 100 to 200 points in a day. Though Sensex subsequently recovered to 26,392, the unease continues amongst many of us. So, what has caused this sudden panic and how should we (NRI’s) prepare ourselves. The following questions may be appropriate to answer.

1. What is this crisis?

The Chinese stock market has been on a roll since November, 2014. The Shanghai index increased from 1,924 to 4,098, representing a gain of 113%, within a matter of 8 months. This was due to easy money available through banks which lured retail investors into the market. Everyone from fishermen to laundry cleaners were busy making money in the stock market. However, as we all know, such a sudden increase in the market through mindless buying can only go on for some time and not for ever. Companies have become extremely over valued and smart investors started exiting the market. This created a panic among retail investors and they were rushing out of the market creating further slide. The government tried to intervene and prop up the market but it failed. The Chinese stock market fell 35% within a span of 2.5 months. On August 24 (Black Monday), the Chinese market fell by a whopping 8.96% and immediately on the next day all global markets fell including India.

But the question is why a Chinese stock market collapse should cause such a global panic. This is because there is a larger worry among global players than the Chinese stock market. That of Chinese economy.

Since 2008 when the last financial crisis hit the world, there have been fears about slowing global growth. While USA has been trying to recover, Europe is in shambles with only Asia left to support. China is not only a significant part of Asia but also the world. It contributes heavily to the global growth in terms of trade (exports and imports). Before 2008, Chinese economy was growing at the rate of over 10%. Today, the growth has slowed down to 6-7% with fears that it will be even lower. When economic growth is low, countries will find it difficult to create employment which will lead to social unrest. It will also find it difficult to attract foreign money which will hamper investments. Business confidence will fall and businessmen will not make any new investments. Hence, it is important for any country to enable economic growth.

China was predominantly depending on exports for its growth. After 2008 financial crisis, the overall growth of trade (exports and imports) reduced thereby reducing China’s growth. Hence, this panic all over the world. In short, today when China sneezes, the world catches a cold!

2. How is India affected by this?

The impact on India is more symbolic than real. Many emerging markets (Indonesia, Brazil, and Russia) are highly dependent on China as commodity exporters. China is one of the largest consumers of many commodities to run its global factory. When China signaled a slowdown in growth, many emerging markets (dependent on china) started feeling the heat and this heat has spread to all other markets including India. Even countries like Germany and Australia (not part of emerging markets but part of developed markets) fell as they have strong links and dependence on China.

India’s economic link with China is very limited. India is not a commodity exporter (like Russia). The only risk India faces is that it can be swamped by cheap imports from China that can threaten local companies. With Yuan devaluation, this threat is real.

The main impact on India will be through its currency. As a fallout to Chinese crisis, many emerging market currencies hit their lows during 2015. (Brazilian Real -26%, Turkish Lira -20%, South African Rand -13%). India is among the least affected currency where the INR fell only by 4% so far in 2015 against the USD. If the Chinese crisis deepens, it will further impact emerging market currencies and we can expect India also to feel the heat in terms of further depreciation of INR.

On the positive side, continuous strain on China can open doors for India as one of the fastest growing economies in the world with least linkages to external world. With America not showing any great signs of economic rebounding and Europe in a limbo state, only very few destinations for investments in the world are left and India can definitely count as one.

3. What should NRI’s do?

In this Chinese crisis, NRI’s experienced both good news and bad news. The good news came in the form of lower currency. For eg., the Kuwait Dinar spiked to Rs.224/KD and seem to be hovering around Rs.217/KD now. NRI’s that remit money regularly back to India will certainly be smiling and would hope for even more depreciation of the Rupee!

On the other hand, the steep fall in Sensex/Nifty caused their stock portfolio values to plummet and they were left worried on what the future course of Sensex could be.

For NRI’s, the following observations can be helpful:

a. The current Chinese crisis is not just a China issue but a global issue that can affect all markets including India.
b. If China slows down (as is feared), it will result in global slowdown, and may negatively affect stock markets and currencies.
c. However, India’s fundamental strength (Strong economic growth, ample forex reserves, less linkages to outside world, new government that is reform minded, and a prudent RBI) will make it as one of the safest destinations for investments for foreign investors
d. The long-term story of India remains solid
e. NRI’s should benefit from the depreciating rupee by regularly remitting money back home and invest in various avenues.
f. Diversify your investments by spreading your savings among risk-free fixed deposits/bond funds, and volatile equity funds with some exposure to gold (as insurance).

The RBI governor is likely to decrease interest rates in response to lower inflation and hence presently FD rates are looking attractive. Also, when interest rates come down, bond funds will do well. In equities, for those that do not have time to follow markets on a daily basis, invest regularly in well performing diversified mutual funds. If you have the time to select sectors/stocks, favor healthcare, auto, FMCG, infotech and banks. Avoid Realty, metal, power, PSU’s and small cap.

One final note of caution to NRI’s in the Gulf. GCC has more linkage to West than to East. Oil prices have fallen from a high of $140/barrel some years before to $40/b now and are expected to remain at this level for some time. Hence, government spending on projects will likely come down which will put pressure on many companies. Hence, restructuring, cost cutting and job retrenchment can be expected. Job security for NRI’s can come only through increased training and further qualifying. Job security should not be based on the hope that oil price will rebound.
 


Mr. M. R. Raghu,CFA, FRM is the Head of the Research Unit and Senior Vice President at Kuwait Financial Centre MARKAZ.
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