Are achhe din over for markets? Only time will tell

Is the market crash just the beginning of a global recession? Maybe. Is the market crash just a temporary blip, providing a great buying opportunity, as during the ‘taper tantrum’ of August 2013? Maybe.

Both pessimists and optimists can make a case. Ruchir Sharma of Morgan Stanley has long predicted a Chinese crash arising out of unprecedented leverage (total debt exceeds 240% of GDP). China’s record growth lifted all commodity exporters after 2003, and China’s slowdown has now sent them crashing too.

Asian manufacturing countries used to exporting to China have also been pulled down. Europe is in the dumps anyway. The US is the one big power growing fairly strongly. Maybe it can act as global buyer of last resort and stave off a global recession. Maybe not.

Pessimists can point out that major countries have already used up anti-recession ammunition in the last seven years. China is already crashing despite huge stimulation that has created bubbles in property and stocks, which are now bursting.

Interest rates are already close to zero in OECD countries, so monetary policy there is like a gun without bullets. Fiscal deficits remain substantial in many countries, which show little political appetite to send them soaring again. World export demand is crashing. If neither monetary policy, fiscal policy or exports can be used to stimulate economies, what can?

Optimists can reply that stock market panic is not the same as real economic trends. The July projection of the IMF puts world GDP growth at a decent 3.3%, and even if that now slips to 3.0% it will be well above the recession level (widely viewed as 2-2.5% growth).

Asset markets have long been inflated by loose monetary policy across the globe. Acorrection is justified, but does not portend recessionary doom.

India is the best-placed emerging market to withstand the blast from China, and become the first to recover. It has a falling fiscal and trade deficit, falling inflation and high forex reserves.

However, if the exit from emerging markets becomes a stampede, India too will get trampled. Bure din are here for some time. Risk-takers can plunge into depressed markets, hoping to make a fortune if things turn around. Risk-averse investors had better stay in cash.

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