Starting new year 2016, we saw sharp fall in domestic Indian stock markets led by the weakening of the Chinese currency, Yuan, whereby, Sensex plunged by over 550 points to close below the 25000 mark at a 19 month low. The big question is, why should we care about what is going in the Chinese Financial markets? Why is there a huge panic selling in the market?
China is a big market for all sort of end products, especially in the emerging markets. Since 2005, after a decade of a steady appreciation in Yuan against the US dollar (approx. 33%) investors had become accustomed to the stability and growing strength of the yuan. However, last year owing to the cooling global demand, Chinese juggernaut too witnessed a slow down. A somewhat insignificant devaluation in Yuan (by more than 1%) exchange rates by the Chinese central bank can make the Chinese imports cheaper, and is therefore believed by many to be a desperate attempt by China to boost its exports in support of an economy that is growing at its slowest rate in a quarter century.
The People’s Bank of China (PBOC) surprised markets by an unexpectedly setting the official midpoint rate on the Yuan at 6.5646 per US Dollar, the lowest since 2011. The ambiguity among investors seem to be around the uncertainty regarding the impact of Yuan devaluation on other export oriented economies. Some investors fear China’s economy could be more weaker than they had imagined. Moreover, fall in Crude Oil prices is also making major oil producing economies face challenges on managing their fiscal situation.
What’s in it for you?
Domestically, macro-economic factors would play an important role in the long term. Rising fuel Demand, increasing vehicle sales, under control inflation levels are suggesting that Indian economy is witnessing a steady growth. However in the short term, global headlines are driving the market sentiments. Analysts are expecting that the selling by foreign players will continue for some more time owing to the uncertainty in China and other emerging markets. Markets are expected to take support at 7400 and traders should avoid buying as there is huge volatility in global markets, however, for investors seeking a long term horizon, it could be a good opportunity to invest at current levels.
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Surbhil is a technologist at heart and aims to enhance the user experience in his customer engagements. He enjoys making financial world simpler and easier to understand through his blogs on Markets, Economy and Tech. He is an IIM L alumni.
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