Investing It!

Impact of US Downgrade on Global Markets

image What we have witnessed in the past few days is the bloodbath in markets across the world. The S&P downgrade of US from AAA to AA+, in my opinion will have a short to medium term impact on the world economy.

 

Reason is that most economies deal with US for business and if US is hurt, tremors will be across the world (butterfly effect). An example is IT industry. With downgrade, US will get less fund flow, and so the organizations will find it difficult to raise money and so this will impact their capacity to implement IT solutions. This way, they will cut down on IT spending, thus hurting IT vendors across the world.

 

But when we look at emerging economies like India and China, they have too much domestic consumption, so even if these countries are hit on exports, they will make it out on domestic consumption. So, In my view emerging economies will have only short to medium term impact due to this downgrade.

Investors across the world will now move to safe haven like gold and other metals and so the prices of these commodities will definitely rise as more investment flows in these asset classes.

 

There is definitely a cause of concern for economies which are heavily dependent on US for exports. For example- Japan, which exports around 16% of its total exports to US; and Taiwan, which exports around 10% of its total exports to US. Such export driven economies which have high dependency on US will have to look at measures to reduce their exposure to US by diversifying their exports and by making domestic consumption better.

 

China, followed by Japan, is the highest holder of US treasury securities, which means that these countries will have a huge concern over the downgrade of treasury.

    

So overall, China will be hit by its huge accumulation of US treasury securities; but will be protected by it's huge domestic consumption.

In the long run, I feel that the BRIC nations will be less affected compared to other economies. There is definitely impact on shares of Indian corporate, but this also offers an opportunity to buy blue chip stocks at throw-away prices. One should look for investment in those companies which have strong fundamentals and whose stocks are available at low prices and go for long term investment in such companies.

     

About the author:

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Ankit Arora is an MBA graduate from the General Management Program of XLRI Jamshedpur. Prior to his MBA, he has spent 6 years in IT industry in Capital markets and Financial services. He has worked with clients in Canada, Saudi and Taiwan; and has worked with various entities like stock exchanges, clearing and settlement houses, brokerage houses, and banks. He can be reached at onlinearora@gmail.com. Read his views on www.ankitarora.net. His LinkedIn profile: http://in.linkedin.com/in/onlinearora

Published Aug 11 2011




Comments

Comments

 

Md Fazle Ali said:

Well written Ankit...Informative article. Keep it up.

August 12, 2011 12:10 PM
 

Neeraj said:

in my opinion, more than effect of downgrading we should think about the fiscal structure of govts, that is responsible for crisis. india is also not far away. our GDP is growing at the rate of 8% and fiscal deficit is also more than 6%. The huge gap in revenue and expenditure, year after year, till when economy bear? from the past several decade not a single budget of central and state govt is positive. all showing huge loss.The present condition in US is a big lesson for us.

Neeraj

g11027@astra.xlri.ac.in

August 12, 2011 2:09 PM
 

Laxman Dubey said:

Nice observation

August 12, 2011 3:47 PM
 

Vinay said:

Nice work Ankit, would like to read more from you in depth.

Thanks !!!

August 14, 2011 6:42 PM
 

Ankit said:

Thanks everyone.

August 15, 2011 11:25 AM

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