Hello G 20 - The world awaits the right direction!!!!

It is said that when things have already gone worse, the only thing that can happen is for them to improve!

The world economy has had its worst nightmare in the past few months and now that there are enough signs of recession engulfing major countries, it seems that what we are seeing is the darkest hour – which comes just before the dawn.

The G-20 meet in London is what the world is eagerly watching with high hopes for a good solution to the current world wide economic problems. While most economists are not sure that a solution will be in place, there is one major favorable factor –all countries at least recognize that every one is in trouble. Most of the time, a good start to a solution emerges from the very recognition that the problem exists.

However there is one major unfavorable factor- the interdependent large economies of China and US seem to be at loggerheads. China wants to de-link itself from the so-called ‘Dollar-regime’; at the same time, US wants China to essentially bail it out by subscribing to the US treasury bonds.

The concern of China seems more reasonable as its holding of US treasury bonds now is in excess of $2 trillion and given the high level of US budgetary deficits, the possibility of a fall in value of US $ and inflation in US is high. This may erode the value of the treasury bonds held by the Chinese. It is for this reason that China wants the G 20 to arrive at consensus to introduce a ‘basket currency’ similar to the SDRs (Special Drawing Rights). The basket currency (and not the US$) should then be used to settle international financial transactions between countries. The US, obviously will oppose this. Thus the standoff.

On the background of this US-China Standoff, the G 20 meet is likely to attempt finding solutions to the economic woes. Who will have the bargaining strength ?? – time will tell - but the more likely situation is that the importance of China, India and other emerging economies – especially in Asia, will increase in the coming years and this can lead to FII funds flowing back in to these after some months of cautiousness.

Given the right boost and a viable solution, China, India and other emerging economies are better placed to come out of the slowdown and regain their targeted growth rates in the next two years.

The fact also remains that, the emerging economies are the ones where the next consumption led growth will ‘emerge’. This should lead to more FDI and consequently FII investments in these economies. The improvement in demand in these countries should then lead to a cycle of recovery in commodity prices, and consequently related industries.

It is perhaps time for the western world to realize that the solution to the world economic problems lay in the eastern world! Enhancing economic growth through non-monetary measures as also controlling social unrest and terrorism activities in the eastern world is hence in the ‘economic interest’ of the western countries.

India being one of the faster growing economies is likely to be a beneficiary of this and is therefore most likely to emerge economically much stronger than before.

Investors – be prepared for this!!!

(Please give credit in case you reproduce this article elsewhere)

CA Rajiv D Khatlawala
Head of Research,
Jhaveri Securities Ltd.
Baroda.