The crash of the Indian Stock Market since January 2008 has been widely attributed to FIIs pulling their money out to meet liabilities and redemptions. According to this article, however, FIIs have only pulled out $12.7bn and still have another $53.7bn, or almost Rs. 270,000 Cr. left in the market. 

A lot of market experts are talking about the market being near the bottom (”Valuations just cannot get any cheaper! The Indian growth story is sound, even at 7%!”) Let’s be clear on this: these falling prices are not about fundamentals - its simply about lack of liquidity. FIIs are not exiting the market because they want to, but because they are being forced to - nobody wants to book such massive losses, and nobody would argue against the fact that as an emerging market India is looking pretty cheap.

The fact that there’s so much FII money still in the market - 80% - is quite scary Read the rest of this entry »

Until a few weeks ago a target price of $100 for crude would have been laughable. The market seemed sure prices would steadily climb towards $200.

So what has happened since then, other than the 25% fall in price?

For a start, many people now predict a fall in global demand, as economies adjust consumption in light of growth forecasts and the high price. This reduction in planned consumption has released the pressure which kept oil at $140 per barrel.

However, it was well known several months ago that further rises in the price of oil would damage the economy; in other words that $200 was not sustainable.

Why then were we so happy to believe prices would continue to rise, and why are we not now revising growth forecasts back up, in light of the recent fall in oil price?

That growth forecasts are not being seriously revised is due to tight global credit markets and perceived instability in the financial system restricting investment, while commodity price inflation is still hurting consumers’ real spending power.

The question of why we were willing to believe oil would continue to rise is more challenging: I believe the markets underestimated the speed with which the US credit problems would spread to the real economy outside the US. This led to an early reduction Read the rest of this entry »