|
|
Home Page
-
Financial Institutions
Investment World
-
Stock Markets
Markets
-
Insight
Dubai World scare, a trigger for correction?
Cranes tower over buildings under construction in the Business Bay area in Dubai.
Aarati Krishnan
Is Dubai World's debt repayment problem merely a delayed aftershock of last year's credit crisis or a fresh tremor likely to shake up the financial system? Opinion may be divided on this; but the event is certainly reason for stock market investors to turn more cautious. For this may be just the excuse the market is waiting for, to launch into a much-needed correction.
The initial stock market reaction
to the Dubai World crisis
has been to batter down
companies which have their
fortunes directly tied to Dubai
or its troubled investment arm.
The stock of Spicejet, in which
a subsidiary of Dubai World
owns a 13.4 per cent stake, has
been marked down and so have
the stocks of Bank of Baroda
and SBI, which have admitted
to retail and corporate loan exposures
in Dubai. History,
however, suggests that investors
need not worry too much
about how these individual
stocks may fare because of the
crisis. The Dubai entities do not
have a significant portfolio exposures
to Indian stocks. Even
if they hold indirect stakes, the
past two years have seen numerous
instances of troubled
financial giants liquidating
their stakes in Indian companies.
Despite recurring investor
worries about `Bear Stearns'
stocks, `Lehman' stocks, `Merrill
Lynch' stocks and recently
`Galleon' stocks, the impact of
the holders' troubles on stock
prices has been quite shortlived.
Stocks with good fundamentals
have rebounded to
pre-crisis levels, finding ready
buyers at lower prices. Stocks
with little claim to fundamentals
have remained battered.
Given that Indian banks
emerged relatively unscathed
from the much larger credit crisis
of last year, investors in
banking stocks may have little
to fear from the Dubai scare.
SYSTEMIC RISK
It is the broader market ramifications
of this event that
stock investors need to worry
about. Some financial experts
are betting on this crisis being
quickly contained through a
bail-out of Dubai World by other
UAE nations. But if this scenario
does not play out, it is
feared that this may trigger a
fresh bout of risk aversion on
the part of lenders around the
world. Going by what followed
last year's credit crisis, this
could lead to a sharp spike in
the borrowing costs for businesses
(and countries) with inferior
credit ratings and a
drying up of the now-ample liquidity.
This certainly cannot augur
well for the many Indian companies
which are now relying
heavily on foreign funds to repair
their debt-leavened balance
sheets. This stock market
rally has been led mainly by
highly leveraged companies
from the commodity and realty
space, making such a scenario
worrisome.
PROFIT-TAKING TIME?
A phase of risk aversion, once it
starts, can also have a big impact
on the overall liquidity
flows into the emerging markets,
India included. Remember
that it was returning risk
appetite on the part of global
investors which laid the foundation
for this entire stock market
rally.
It is rising risk-taking which
has prompted global investors
to abandon the safer developed
markets and money market
funds, and to pour money into
all manner of risky assets -
commodities, emerging market
bonds and emerging market
stocks - over the past eight
months. The returns from
these assets have by now exceeded
everybody's wildest expectations.
The temptation to
take money off the table and
lock into those sizeable profits,
is, therefore, bound to be quite
high. The Dubai scare has also
cropped up at a time when the
global markets are being assailed
by fresh doubts about the
sustainability of the ongoing
economic recovery. Will governments
be able to exit from
their big-ticket stimulus spending?
Will the "recovery" sustain
once the props of stimulus are
removed? Is consumer confidence
robust enough to carry
the baton from here on? If the
answer to any of these questions
turns out to be a "No",
then the current stock market
rally, which is built on optimism,
would certainly be due
for a pause.
Indian investors also need to
weigh a few additional factors
on the scale. At over 21 times
trailing earnings, the BSE
Sensex is already quite close to
the inflexion point at which
previous bull markets (of 2007-
08 and 1999-00) halted. With
topline growth proving elusive
for many companies, even in
the recent September quarter,
doubts are beginning to emerge
on whether Corporate India
can deliver on these high expectations.
But, most important, irrespective
of how its own corporate
or economic fundamentals
look, India has always proved
to be a high Beta market in the
global scheme of things. It
races ahead of most other markets
when the going is good, but
takes a merciless battering
when liquidity flows suffer the
mildest blip. That may be reason
enough for Indian stock
market investors to take some
money off the table now.
Related Stories:
Dubai crisis rocks realty stocks in the morning session
More Stories on :
Financial Institutions |
Stock Markets |
Insight
Article
E-Mail
::
Comment
::
Syndication
::
Printer Friendly Page
|
|
