Stock market investors might have to weather the heightening uncertainties surrounding the US fiscal cliff over the next few weeks, as markets look to extend their winning streak to 2013. Fund managers and analysts said the lack of agreement among US lawmakers just a week ahead of the fiscal cliff, which involves hundreds of billions of dollars in government spending cuts starting January, is making the market nervous. US markets declined one per cent on Friday on such worries.
A possible US recession will hit the world economy, which is trying to limp back to recovery after the sovereign debt crisis in Europe. The triggering of the fiscal cliff will have an impact on global markets as this will squeeze liquidity and spark an exit of foreign money from emerging markets, including India.
"The Fiscal cliff is definitely a big event. If this gets sorted there is going to be a big rally in the India markets. If it does not, there will be a sentimental impact and the flow of foreign money could get impacted, which could also lead to some correction in the Indian market," said Gopal Agrawal, chief investment officer, Mirae Asset Global Investments.
Foreign institutional investors have poured close to $21 billion into Indian equities so far in 2012. After rising as much as 20 per cent since January, Indian stocks have corrected almost two per cent in the last few days, ahead of the deadline of the US fiscal cliff.
“As of now, fiscal cliff issues continue to overshadow any other economic news,” says Amar Ambani, head of research, IIFL.
Including all the automatic tax increases and spending cuts, estimates suggest the US economy could take a hit of $500-600 billion, about four per cent of its gross domestic product (GDP) and good enough to take the GDP back to recession. On an average, about $2,200 extra in early taxes will be paid by the average family.
Investors could seek more clarity on this issue before committing any fresh money.
"The markets are hoping for a solution to the US fiscal cliff issue because if a solution is not reached, it can impact sentiments negatively,” says Dipen Shah, head of private client group research, Kotak Securities.
But fund managers and analysts are hopeful that US lawmakers will be able to reach a consensus on this issue as the ramifications of the fiscal cliff could be devastating. Fund managers said a correction arising out of such uncertainty could be a good time to invest.
“We expect the issue to be resolved and the same can provide relief in the short term," said Kotak’s Shah.
Agrawal said, “I do not think we are in for a major correction because ultimately the markets will start factoring the earnings and valuations.”
