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As we go into the fall of 2018, there is euphoria and excitement in the air in the US.
Fall is traditionally associated with changing of the colour of leaves, a new beginning and rejuvenation of the spirit.
It is also associated with extreme volatility followed by optimism and hope for a better future.
The Second World War, the 9/11 attack on the World Trade Centre and the Global Financial Crisis, all had their genesis in the fall.
While Wall Street is celebrating the longest running bull market in history and companies in the SP500 have reached their highest levels and are generating cash flow as never seen before, the expectation is that the Federal Reserve will temper this rally while being on course to continue to raise rates for the seventh time since December 2015 and the third time this year later this fall.
The Fed has not been able to slow down or put a dent to this rally.
The growth that the US economy is witnessing – harnessed by lowering of corporate taxes by the Trump administration while boldly renegotiating trade deals with its allies that no one could forecast or fathom even 18 months ago –has taken the world by storm.
Add to this the fact that the US is at or near full employment.
It must, however, be noted that almost 30 per cent of earnings growth of the SP500 firms comes from outside the US, and one cannot presume that the US can consistently be an oasis of calm and an island in the ocean.
The smart money in New York is on India, as it has a relatively substantially stronger balance sheet compared with most other emerging markets and has a lot going for it with the fastest growing GDP in the world in 2018 in spite of a higher interest rate regime.
The recent decision by the Saudis to dela y the Aramco IPO is leading to pressure to increase oil output, putting pressure on oil prices in the short run.
This should give India some respite, at least temporarily, as it bears the brunt of Fed rate hikes.
The positive outlook is that the rupee depreciation in the short term may reverse equally faster with the projection of relatively lower oil prices.
The Fed decision to continue to stay on course is a reflection of the power that US interest rates have on the rest of the world, and the consequences on which regulators in other countries have little control.
It still remains to be seen how much damage and chaos it will cause, as the European banking system struggles with junk bonds of Greece, Italy and now Turkey, with most Turkish debt being an added noose around the larger European banks.
Add to this the effects of Brexit and the demand by the German Central Bank to raise rates due to higher inflation, a subject on which Mr Draghi is refusing to budge.
China’s economy has a trillion dollar surprise for the world, as growth rates falter, domestic debt levels rise and the yuan becomes a victim to the strength of the US dollar similar to that of most other countries around the world, including Australia, that have a substantive balance of payments problem.
To most Americans, India seems a better option from an investment destination standpoint with the positive steps and changes made by the Modi Government to institutionalise technology in the economy and enforce GST, Bankruptcy Act, RERA and a host of other regulatory steps to bring transparency in the economy and, thus, reduce transaction cost.
Above all, India has a miniscule presence in global trade, unlike the Chinese, who are viewed as a direct threat to US manufacturing.
India’s commitment to demonstrating its strength in intellectual capital in the services sector and the recent focus of larger technology companies to co-locate and graduate to machine learning and artificial intelligence from their traditional focus on body shopping is paying off, with India seen more as a partner that a threat to US businesses.
Regardless of that, Indian regulators need to give a serious thought to come up with a solution to counter the rise in Fed rate hikes in the short term, as India will no doubt have to bear the impact of these rate hikes.
So much for the cause of Freedom, which now rests fully with the US Federal Reserve!
