The uprising against the 30-year rule of Egyptian President Hosni Mubarak seemsset to impact stocks across emerging markets this week, as investors, concernedabout the impact of the political turmoil on the wider Middle-East region andrising oil prices, may flee riskier markets to traditional safe-haven investments like precious metals and US Treasury bonds.
Fundmanagers said global investors, who pulled 5,500 crore, or $1.1 billion, out ofIndian stocks in January due to inflation worries, may use the Egyptian crisisas a reason to hasten exit from emerging marketequities.
“Negative news such as the chaos in Egypt will onlyadd to the market volatility that has already been created by inflationary pressures (in India),” said A Balasubramanian, Chief Executive Officer,Birla Sun Life Mutual Fund. “We also think domestic inflation is a biggerconcern,” he said.
On Sunday, Middle-East shares dropped,sending Dubai’s index down the most in eight months, Bloomberg reported.On Friday, January 28, the MSCI World Index fell 1.4% as protests gatheredmomentum in Egypt.
Gold and silver prices rose on Friday as investorsshifted money to these assets, traditionally considered safe in turbulent times.Crude oil prices recorded the steepest rise since 2009 on fears that protestscould disrupt supplies from the oil-rich Middle-East. Besides Egypt, protestershave taken to the streets in Jordan and Yemen. Many US stock indices fell over1% even as the economy grew 3.2% in the fourth quarter from 2.6% last quarter.US investors on Friday ignored the 4.4% jump in personal consumption reading inthe quarter—the strongest increase in fouryears.
Repo rate may go up by 75bps
But a consistent recovery in that reading may encourage USbanks, which have been among the investors who poured $29 billion into Indianequities in 2010, to take back some money back to finance improved consumerspending there.
Global investors are worried that sticky inflation,led by spike in food prices, will impact India’s consumption-led economicgrowth.
The Reserve Bank of India raised March-end inflationprojection to 7% from 5.5% earlier, leading most to be believe that the policyrate increases may not come to an end soon. On January 25, the RBI hiked bothpolicy rates—repo and reverse repo—by 25 basis points to 6.5% and5.5%, respectively.
The consensus view is that the repo rate, the oneat which the RBI lends to banks, will go up at least 75 basis points more in2011. Many expect a 100 point rise. A basis point is one-hundredth of apercentage point. RBI has been gradually raising rates to avoid a shock toborrowers though many have criticised it for being behind the curve when itcomes to heading off inflation.
"Investors are worried more about theimpact of higher commodity prices on corporate earnings rather than higherinterest rates," said Balasubramanian. "Our study shows that higher interestcosts is unlikely to impact growth unless overall business slows down," hesaid.
Technical analysts said charts are pointing to more pessimismin the short run. "For the bulls to prevail over the bears, it is important thatthe Nifty remain above the 5560 levels consistently on Monday—a tall orderconsidering the overhead supply and geopolitical stress in the Middle East,"said Vijay Bhambwani , chief executive of BSPLindia-. com, a Mumbai-basedinvestment firm. The Nifty closed at 5512 on Friday.