We live in a sentiment-driven world

Dubai: My barber is not a happy soul any longer. Over the past few months I have discovered that his mood swings have some sort of correlation to the movements in Sensex, the main Bombay Stock Exchange index.

In fact, during one of my visits to him about two months ago, he was very bullish on the market and very proud of his portfolio. He even gave me a few tips on stock picking. Some of his reasoning sounded as appealing as that of Mark Mobius or Warren Buffett.

Last week, I noticed him looking confused and sad. I didn't want to start a conversation. But eventually he let out his anguish with a point-blank question directed at me.

"Why should the Indian stocks tank when Americans and Europeans can't manage their government debt?"

I could not escape this one. The haircut had only just begun. I took a deep sigh and gave him a vague lecture on how globalised the world is today and how events around the world can affect all our lives. I knew I was not directly addressing his question because I simply didn't know enough. I suspect he too sensed my helplessness and did not pursue the matter any further.

Heading back home I gave his question another chance. If everyone is saying that India's economic fundamentals are strong, then why should a credit downgrade in the US or a few sovereign defaults across Europe bother investors on Indian markets?

Positive news

At home I headed straight to my laptop to find the latest economic forecasts on India. Most of the stuff I read was positive.

The latest and the most glowing was the one from research firm Dun & Bradstreet, named ‘India 2020' which predicted the country will become a $5.6 trillion (Dh20.5 trillion) economy by the end of this decade with a three-fold jump in the country's GDP, from $1.7 trillion last fiscal year, on the back of rapid domestic investment and growing consumer expenditure.

Just when I thought I had some good news for my barber, his original question again came back to haunt me.

I called up an economist friend and presented my dilemma. He came up with a somewhat plausible answer. "It is sentiment rather than fundamentals that has been driving the market in the recent weeks," he said.

Lessons from the recent past suggest that any global economic slowdown could affect India mainly through three channels — trade, finance and the sentiment.

Quantitative easing

As far as trade is concerned a certain degree of decoupling is still possible by adjusting the composition and destination of trade. The US and EU, which accounted for 46 per cent of India's exports in 1995, accounted for 32 per cent of exports in 2009.

Capital shouldn't be a serious concern for an economy the size of India's because the huge amount of liquidity created in the developed world to ward off a double dip will have to find a home in reasonably yielding assets.

While the Federal Reserve and Bank of England have decided to keep interest rates at historical lows, the Fed has not ruled out another round of quantitative easing.

Fair chance

In the ensuing global flight to quality, asset managers will have to allocate more funds to markets that are fundamentally strong and are attractive in terms of valuation. India clearly stands a fair chance.

Although a complete decoupling of global market sentiment is impossible, the flow of bad news from elsewhere will eventually be discounted by investors if the economy can grow at a respectable rate compared to the rest of the world as it did during 2008-09.

I think I need to let my barber know things are not as bad as he thought. I too have self-interest.

These days even my hairstyle is correlated to Sensex, US credit rating and European debt default or whatever one can think of. After all we live in a sentiment driven world.