Storm In The Desert: What It Could Mean For India

The joke doing the rounds since yesterday is quite cheeky! It goes “Du-bai or not Du-bai that is the question”. Ha! Quite tongue in cheekish but appropriate all the same. When the markets open this week that’s the first question that traders and investors the world over have to answer. In a previous article posted this month titled ‘Signs Of A Correction’ , I remember ending that post with these words and I quote straight from the article “A correction around this time is likely to be a drawn out one. Price wise and time wise unless of course some big event casts its shadow and spooks the market leading to a tremendous fall.”

The events related to Dubai and the news that comes out of there this week has the potential to be that ‘Big event which spooks the market’. It’s something that can shift the Indian market from the current bullish gear to a selling, fear driven frenzy.

Here’s a brief look at what the problem actually is:

1.   The Issue - Dubai World is owned by the Government of Dubai. It’s an investment company, the largest state owned in Dubai. On Friday it reported that at the moment it has to default .In very simple terms it’s like saying someone took a really big loan from a bank and is unable to pay it back. The size of the loan is huge, around 80 billion dollars.

2.   Why It Spooked The Markets – If the government itself is saying it has no money to pay back the loan then people are bound to panic because a major Middle Eastern country is suggesting that business is not so good. Every international company American, Indian, Chinese or Canadian doing business in Dubai is now wary because they might be unable to receive payments from operations over there.  Revenue estimates shrink as there’s fear that banks which lent all that money to Dubai will not get it back. The impact has played out on the stock markets.

3.   The Impact On India – Exposure of Indian real estate companies to Dubai is very less. So the direct impact is low. Both the Finance Minister, Pranab Mukherjee and the Minister for Trade, Anand Sharma have said that India is safe from the Dubai storm but then again that’s a political line.

Bureaucrats in the same ministries have said that India will be affected.The immediate impact is on the stock market. Both the Sensex and the Nifty fell on Friday by huge points. How the Dubai news impacts the world markets will determine the behavior of the Sensex and the Nifty. It’s like last year; news of the Lehman Brothers crash scared the world markets. Even though India had not much exposure to the US sub prime crisis, our indices still tanked by over Forty percent to the current level because investors pulled out their money.

4.   Signs Of Hope – The Sensex tanked by 600+ points when the news initially broke but closed the day after rallying 400+ points from there on. We thus closed down only 200+ points down, this is a sign that the market was spooked but did not become overcome by fear.

5.   The Immediate Future - Whether this continues in the coming week(s) is impossible to say right now. Yes, the markets are very apprehensive because this could snowball into a vicious cycle of fear. Combined with the fact that the world is only just stepping out of recession this could lead to another really big downturn.

For now no one is suggesting this.Dubai might well be bailed out by Abu Dhabi. So let’s just wait and watch to see how the markets react keeping the above in mind.

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