Analysts believe this is not the first time that the US’ withdrawal has led to a power struggle. However, the world markets are unlikely to react significantly, as the crude oil market is cartelised and the cartel controls price movement, unlikely to swing substantially in any one direction. Says Saurabh Mukherjea, chief executive officer, institutional equities at Ambit Capital: “What is happening in Ukraine and Iraq does not necessarily translate into risk for global equity markets.” Ukraine is unlikely to be a flashpoint, as the US does not seem to have appetite for any confrontation with a re-assertive Russia.
There has been much talk about a sharp reversal of portfolio investments from emerging markets if geopolitical risks escalate. However, there is plenty of liquidity in world markets. The Bank of Japan announced a massive quantitative easing programme and started buying back government bonds and other risk assets. The biggest beneficiaries of this loosening have been the Asian economies. HSBC Global Markets says: “Japanese capital has helped offset some of the outflows associated with last year’s US Fed 'taper tantrum’. For example, India witnessed $3.8 billion in capital outflows between Q2 2013 and Q3 2013. However, flows from Japan were positive ($0.7 billion) during the period.”
In the coming months, what will drive Indian equity markets is domestic growth. CLSA’s Chris Wood in his weekly note says: “Greed and fear would advise investors to ignore entirely the alleged disappointment over the Narendra Modi government’s first Budget. Greed and fear will increase India’s Overweight in the Asia-Pacific ex-Japan relative-return portfolio by one percentage point this week with the money taken from Hong Kong.”