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Decoupling and all that!

Posted by abyjain on January 23, 2008

Over the past few months, there has been a lot of talk about decoupling in the worlds economic markets and how Europe or China or India are not going to be affected as much when the US goes down.  And now, as the whole world catches a cold, there are more comments of how that is not true. To me, both of these versions are flawed. It is obvious that it is neither black nor white. Anyone in the world can not claim to be not affected when the US economy goes down, but, what we can definitely say is that businesses are on the whole far more “insured” today as compared to 10 years ago. On the one hand, every market in the world will swing wildly when the biggest FIIs start pulling money out of investments, but on the other hand companies (especially in India) will still march onwards to stellar growth and results. It is the panic of the domestic investor that is causing them to lose money. I’ll write more on that in another post, but basically my point is:

a) Decoupling is true, and more so for India than most others, in the sense that we are not so export-dependent as China. The biggest companies in the sensex will go on doing amazing business and keep growing in spite of what happens in the US. Of course there are some export oriented segments or US oriented companies which might suffer in the process. The fact that stock prices have gone down does not mean that the companies have just become unprofitable, or not-so-profitable or anything else. Its just a case of demand and supply of the shares – it’ll change again soon enough.

b) Decoupling is NOT true in the financial or equity markets. Today money flows almost freely from one country to another. But of course we are going to see a fall in Indian equities if the institutional investors are all pulling out money. Moreover, this decoupling will never happen and more in my next post.

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