US Federal reserve is planning to increase the interest rates in this year 2015. Fed Balance sheet is now 2.5 times larger now compared to 2009. In 2009, US started the Quantitative Easing Program. While most of the countries around the world are trying to devalue their currency or reduce interest rate to boost their local economy, US is moving in the opposite direction.
US$ has been gaining value against other major currencies. It will become even stronger.
The major impacts of the dollar rally would be :
- Selling pressure on the assets in other countries : Smart investors will try to move their assets and investments from other emerging markets to US market. Stronger dollar reduce their ROI. For example, if a stock market of an emerging country returns 12% and the currency loses 6% value against US$, in US$ terms, the return is only 6% for the investor. This makes investments in other countries less attractive to US investors and institutions.
- Oil prices are expected to be cheaper.
- Investment in Gold will come down. Gold is a great investment when things are bad. With stronger US$, investor does not need gold any longer. Gold is expected to be in the range of $1100-$1300 per ounce for this year.
- Bad dollar debt : Individuals and Companies that borrowed money in US$, since the interest rates were low in US, will feel the pinch this year to repay the debt, converting money from another currency.
What does these do to Indian economy and stock market ?
- Even though flight of capital out of emerging markets are expected, the same may not be applicable to India. Among the emerging markets, India is batting in a strong wicket. Natural Resource exporting countries like Brazil and Russia are fighting low commodity prices and oil prices. They no longer decide the prices of their goods. They are now price takers. China is expected to grow slower compared to India this year. There are other smaller emerging economies Nigeria, Mexico, Malaysia and Indonesia etc., None of them look as strong as India for year 2015. So, when the flight of capital does happen, not only India may not lose much capital, it may attract some coming from these countries. A big positive.
- Cheaper oil prices are definitely going to help by reducing import bill, and thus accelerate growth in Indian economy.
- Indians and Gold. Should I say more ? After pathetic performance of gold in 2014, the household savings on the gold has come down. Central government import taxes on gold also help the situation a bit. Some of the speculative investments in Gold may be diverted to stock market.
- Dollar debt. while all the above 3 items are positive for Indian market and economy, dollar debt is a problem. Several Indian companies have borrowings in US$. Some of these companies may have this debt affecting their cash flow and performance. This might reflect in the stock prices. Stock pickers should watch for company debt in foreign currencies.