Stock-market blues, and after

Last week the term ‘sub-prime’ engaged the attention of stock market investors in India. Not having heard the curiously sounding term before – agreed I’m not an investing expert who ought to have known it – I banked on the info-spewing Internet search.

What I learn is that in US (may be in other big markets too) hedge funds offer financial package as loans to that section of populace who are considered as having low creditworthiness. May be interests charged for such loans are more than the usual going rates. This is referred to as the ‘sub-prime mortgage market’.

Crisis erupts when the sub-prime loans start defaulting en masse presumably for reasons such as interest rate hike. When that happens as it has currently, the hedge funds that are basically those that manage private investments start offloading stocks in other markets in order to cut/cover their losses.

Analysts say this is the prime reason behind stock market debacle in India last week. But next week may unfold a radically different story. Why? Here are the reasons:

1. First the US Federal Reserve, the world’s most powerful monetary authority, has reduced the interest rate at which it lends to banks by half a percent to 5.75%. This will have immediate effect in cooling down the storm on account of sub-prime default.
2. Second, the inflation rate here has reduced to 4.05% from 4.45% a week before, which is lower by 1% than the corresponding rate in previous year of 5.08%.
3. Third, contrary to popular expectations, the value of Indian Rupee has decreased against the US Dollar to 41.37 yesterday, which is a welcome news for high-forex earning companies like those in the IT sector.
4. Fourth, India’s growth story continues unabated. There is a surge in FDI (foreign direct investment) in the current fiscal. Q1 inflow is $4.9 billion, 185% higher than $1.7 billion received in Q1 of last fiscal, while the first 6 months of calendar year 2007 have seen FDI worth $11.4 billion compared to just $3.6 billion a year ago.

   Of the current year’s FDI bonanza the first place goes to UK’s Vodafone, which has contributed $801 million for buying into Hutch (see my post, Vodafone on call).

5. Fifth, despite occasional hiccups the rainfall thus far this year has been pretty good, thus brightening the prospect of agriculture output. Good monsoon has traditionally been a welcome development for Indian bourses.

What do all these mean? Among others a likely rally in the bourses next week is a possibility.

If that happens, and if the markets do open with a large higher gap from their closings yesterday, it may prove to be another opportunity lost for many investors who haven’t bought lucrative stocks at lower levels during the turmoil last week.