Can the USD and the US Markets both underperform Emerging Markets Currencies and Emerging Markets Assets?

Visit any financial website, ask any financial commentator or investment guide or expert about where the Dollar is headed, there would be no debate, the answer would be unanimous, the jury would be don’t buy the dollar, don’t buy any assets having there value in dollar, you will also find that gold bulls advocating buy the gold, but don’t buy it in dollars, buy physical gold, but are the dollars fundamental so weak against every currency in the world, have the analysts forgot that while the United States might be the debtor nation of the world, it is the investor nation of the world, have you read the explanation given by these same analysts for the boom and busts in the emerging stock markets, Isn’t any rally in the stock markets explained as foreign investors dumping the dollar and running for riskier assets in the emerging markets, what about the crash, isn’t it explained as foreign investors dumping the riskier assets for the safety of the safe haven called US dollar, now who are these foreign investors definitely they are not we Indians, nor are they our neighbors Chinese, and the Brazilians who have seen there stock markets skyrocket, are definitely not looking for inflation outside, so who are they? They are the Investment banks, hedge funds, fund managers and whose funds are they investing, the funds of US citizens or developing world nation citizens, what is there share in the market capitalization of the Emerging Markets space, lets have a look at Indian Stock Market, the Market Capitalization of all the firms listed on the Bombay Sock Exchange (BSE) is above 1 Trillion USD, the biggest Indian Company by Market Capitalization is Reliance Industries and Foreign investors hold about 16.5% of the Company, ICICI Bank, its one of the largest banks, Foreign Investors hold about 35% of this Bank, HDFC the biggest home mortgager of India, Foreign Investors hold about 59% of the Companies Market Capitalization, The biggest Outsourcer of IT solutions from India, Infosys, Foreign investors hold about 36% of Infosys, Except the PSU’s like ONGC, BHEL, NTPC which together have around 20% weightage in the Sensex and public shareholding is just about 20% and hence the Foreign Investors holding is quite low, most other largecap and midcap companies have more than 15% of there equities in possession of Foreign Investors, If we take 15% as an average estimate of Foreign investors holding in India’s Market Capitalization, Foreign investors hold about 150 billion USD equity assets in India.

Now the Foreign Investors are not just investing in India but all over the world, if we take the average estimate as 15% market capitalization of emerging markets is hold by foreign investors, then lets calculate how much the Foreign Investors hold, China and Hong Kong have market capitalization of around 2 Trillion USD, Korea has total value of equities on its bourses as 1 Trillion USD, Brazil has market capitalization of around 1 Trillion USD, also a point to be noted here is that the total market capitalization of the World might be standing close to 50 Trillion Dollars and out of that close to 40% would be contributed by emerging markets, so around 20 Trillion Dollars is the total market capitalization of the emerging markets space and 15% of that is hold by US and developed nations citizens so around 3 trillion USD is what the US citizens can get if they sell all there holding in the Emerging Market space.

According to http://en.wikipedia.org/wiki/United_States_public_debt China with 800 Billion USD is holding 23.35% of the total US Foreign debt, which means The United States owe the World around 3.3 Trillion USD, while they can recover near about the same amount if they sell there assets all over the world, So its not just that United States is Fishing in troubled waters, All the World is fishing in the troubled waters, albeit US is in the drivers seat so in fact it knows beforehand when the vehicle is going to crash, now I am not telling that the USD wouldn’t crash, I am just suggesting that USD wont crash with the Emerging Markets Stock Indices rallying, it could be like the USD crashing and the Dow Jones Index gaining 2% while the Emerging Markets Index rally 1%, why because If US Federal Reserve prints money, The USD would crash, The US would face inflation, and inflation more than what the world would be facing, which means the US assets would be inflating more than the assets round the world, which means investors in search of more returns on there investment would park there money in US assets while dumping the Emerging markets space. Summing up don’t dump the USD and the US assets at the same time.

Stock Market and Currency Movement - Indian Perspective

On July 25, 1990 Sensex touched a milestone mark of 1000, 17.5 Rupees sufficed to buy 1 Dollar at that time, Sensex seemed to like to be a deer chased by the tiger i.e investors and Sensex touched the magical figure of 4000 just at the arrival of the spring i.e in March 1992, a whopping gain of 300% in over just 18 months, but contrary to the mass opinion that gains in stock markets lead to gains in currency as foreign investors would be lapping the listed equities at whatever price they get, the Indian currency Rupee depreciated against the Dollar and against every 28.37 Rupees 1 Dollar could be bought in March 1992, The Indian equity markets opened for the Foreign Investors in 1992 and celebrating the event the Sensex rallied from 2000 to 4000 from January 15, 1992 to March 30, 1992 i.e 100% within 2 months, your guess is my guess, you must be expecting that rush of the foreign investors pulled the markets and so Rupee might have appreciated against the Dollar, but contrary to our opinion while in January 1992 25.86 Rs fetched 1 Dollar, the rush of the foreign investors could not the stop the rupee from depreciating and 28.37 Rupees by an Indian Importer could purchase goods worth 1 Dollar, i.e while foreign investors were lapping Indian Equities they were hedging there positions by going short the Rupee and buying Dollars, or there were many other traders who were shorting the rupee and going long the dollar.

Stock Market and Currency Movement - Indian Perspective contd

The economic liberalization led to growth and India started having a place in the top growing countries of the world, Big time Fund Managers with billions of funds at disposal started mentioning India as one of there favorite money parking destination, again the facts about the movement of the currency don’t match the theory the analysts have on movement of currency, while India was growing the Indian currency was depreciating against the dollar and by January 2000, 43.58 Indian Rupees could fetch 1 Dollar, in the meantime Sensex which was at 4000 in 1992 could not keep the up the tempo which it had maintained in the period between 1990 -1992 and was trading at just 6k in Jan 2000, The burst of technology bubble saw the world markets sinking, and Sensex too could not hold onto the gains which it had accrued in the last 8 years and by 2003 the Sensex lost all the gains it made in the 8 years from 1992 to 2000 and was trading at 3000 i.e 25% loss in 8 years, the new money printing presses opened by Alan Greenspan (the Fed Chairperson) saw starting of a new bubble in United States, and going the theory that is US sneezes Emerging Markets catch cold, Is US Smiles the Emerging Markets should have a laugh, so the Sensex returned to its exuberant speed that it first saw in 1990 -1992 and this time it traded at 21,000 by the close of year 2007, well this rush of foreign investors who were selling the Japanese Yen and investing the money which they literally got at 0% in the high yielding but risky emerging markets, could not make the Indian currency appreciate to a level where it was when the doors of Indian equity markets were opened for Foreign Investors, well the rush of the foreign investors could only do as little favor to the Indian that now 38 Rs were required to purchase 1 Dollar i.e while the Indian Sensex returned 500% gains for the Foreign Investors who purchased in 1992, the Indian currency halved there profit by depreciating 50% in value.

In the next few posts we would see How the Chinese growth story of 10% made its impact on the Yuan, we will also have a look at how the deflation in Japan created a movement in Yen. And then we will try to analyze how the dollar is likely to move if it is going to follow history.