As US braces for stock market 'corrections', Indian investors wary

The author of the bestselling book 'Rich Dad Poor Dad' predicts that a "giant" market crash coming in October has already been triggered and will bring down stocks, real estate, gold, silver and Bitcoin with it. The personal finance expert Robert Kiyosaki warned that the crash is coming regardless of what measures are imposed by US Treasury Secretary Janet Yellen or Federal Reserve chair Jerome Powell.

The stock market was being artificially inflated by the Treasury Department and the Federal Reserve with decisions disconnected from the realities of the current economy in the United States, the British online newspaper The Independent quoted him. Mr. Kiyosaki said people don’t have to go to Harvard University to understand that "you can’t keep printing fake money… that’s not good". Large and sustained federal budget deficits are harmful to the fiscal health of any country.

Even in times of pre-pandemic economic growth, the US federal government ran large and growing budget deficits, near about $1 trillion per year. Now that the policymakers are enacting necessary, emergency measures to combat the crisis, US federal budget deficits are escalating to levels not seen since World War II.

So far, in this fiscal year (the eleventh month of fiscal year 2021), the US federal government has run a cumulative deficit of $2.7 trillion - the difference between $3.6 trillion in revenue and $6.3 trillion in spending. This budget deficit is more than 150% larger than the pre-pandemic year, FY2019 deficit. This year's fiscal deficit of US is projected to total 13.4 percent of its gross domestic product (GDP), making it the second largest since 1945, exceeded only by the 14.9 percent shortfall recorded last year.

Mr. Kiyosaki said that Ms. Yellen and the Fed are "scrambling", because they’ve expanded the volume of money while the velocity of money is plummeting as no one spends and their cash lingers in savings or flows into stock markets and other asset classes. "we’re stacked with this massive debt and all it’s done is bump up the stock market and real estate market" he said. "The money has not gone into the economy, that’s the sad part. So, the rich get richer, but the poor and middle class are getting poorer. It’s tragic what’s happening today."

Mr Kiyosaki cautioned that it will be sooner-than-later that the "house of cards" is coming down and that real estate would crash with the stock market, while the impact from China’s Evergrande Group implosion would spread to the United States. Evergrande, the second-largest real estate developer in China and the most indebted company in the world, is on the brink of bankruptcy with more than $300bn in debt - a sum equivalent to 2% of China's GDP.

U.S. equity benchmarks just saw the worst September month in almost a decade. In fact, all three major indexes notched their worst performance in the month since 2011, when the European debt crisis took a toll on stock markets worldwide. To put things into perspective, the Dow and the Nasdaq slumped 3.5% and 4.6%, respectively, in September. The S&P 500 declined 3.9%.

In September, the US stock markets corrected due to myriad issues. First, investors dumped stocks on contagion fears linked to the collapse of Evergrande Group. Second, companies in the United States have begun to witness downward earnings estimate revisions, primarily due to supply-side constraints, which again roiled markets. Last, bond yields climbed and particularly damaged the allure of growth-oriented technology stocks.

Indian stock markets are not immune to global cues. In the five consecutive trading sessions till October 1, Sensex has lost 1300 points. The valuation premium of Indian equities compared with emerging market counterparts has risen to a decade high. According to Bloomberg data, the MSCI India index, a measure used by global fund managers to gauge the performance of Indian equities denominated in dollar terms, trades at 80% premium to the MSCI EM index, which represents the emerging market (EM) equities. It is much higher than the long-term average premium of 44%. Foreign Portfolio Investors have invested disproportionately higher allocations in Indian stock markets, compared to other emerging markets. The value of the foreign portfolio investors’ (FPI) holdings in the domestic equities reached a record $555 billion in 2020-21, a whopping $105 billion growth between September 2020 and March 2021, according to a report of Bank of America Securities. High valuations combined with high FPI investments can bring down the Indian stock markets, as and when Fed tapering begins.

Worsening matters, the month of October is expected to be even more volatile for the stock markets. Traditionally, the S&P 500 index had decreased 0.4% in October. This month has witnessed some of the biggest stock market crashes in US. Notable among them are the 1929’s Black Tuesday and Thursday, and the great crash of 1987, which occurred on Oct 19. On that particular day, the Dow had tanked more than 20% on a single trading session, making it debatably the worst single-day decline in history.

This October, we may not expect such big crashes, but certain things aren’t looking up for the stock market either. Concerns about a debt-ceiling breach by US, Fed moving- away from its accommodative policy, growing sovereign debt piles world-over, corporate defaults, asset price bubbles and China's faltering economy are all weighing down on the minds of investors.

( V Venkateswara Rao is an alumnus of IIM, Ahmedabad and a retired corporate professional.)