The Hindu Business Line : Market View

Given the fundamental structural trends inherent in the long-term development of the emerging countries, we still believe we will see substantial economic independence, i.e. a decoupling between the South and North. Of course, economic decoupling does not necessarily mean decoupling between financial markets. Moreover, the correlation between developed and emerging equity markets, barring any crisis in the latter, has always been about 80 per cent. Let us now examine the arguments in support of the decoupling theme between the developed and the emerging economies.

Over the past few years, , the robustness of emerging country exports depended more on the rapid growth of intra-regional trade than on G-7 countries. China replaced the United States as the main purchaser of emerging country exports and currently exports fewer goods to the US than to the rest of Asia. However, the still large gap between production costs in the North and South means not only that the emerging economies will gain market share as global demand slows, but also that the transfer of production capacity to the emerging countries will continue and even accelerate. These two effects will considerably reduce the negative impact of weaker global growth on domestic demand in the emerging economies. Another force that will transfer production capacity is the stronger endogenous demand in most of the large emerging countries. The high level of investment also generates technological progress and therefore larger gains in productivity. A higher potential growth rate means higher incomes and therefore stronger demand.

BNP Paribas Asset Management

India is relatively insulated to any sharp slowdown in the global economy due to domestic drivers such as investment and consumption. However, given that financial markets have increasingly integrated with their global counterparts in recent years due to growing foreign investments, overseas investor sentiment will impact domestic equity markets.

The current consolidation in the Indian markets has come about after four straight years of a strong rally and was along expected lines. The medium term direction will be driven by emerging cues about the extent of slowdown in developed economies and the consequent impact on risk premiums. Valuations have become reasonable after the recent declines. We could see moderation of the margins for Corporate India and stock picking will become more relevant, as corporate governance standards change in a challenging environment.

Franklin Templeton India

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