CONTENT Factors for US Downgrade Prospects for Developing Countries Impact on India
MAJOR FACTORS FOR US DOWNGRADE Debt ceiling Limit set by US congress on the amount of debt the government can borrow. High fiscal account deficit In 2011 federal budget, the US government estimated the expenditure at $3.82 trillion and revenues at something more than $2 trillion U.S. political problems To approve the debt ceiling both democrats and the republicans agreed on consensus. S&P cut down the rating from AAA to AA+
PROSPECTS FOR THE DEVELOPING COUNTRIESIN THE LIGHT OF DOWNGRADE The world economy continues to recover from the global crises It would take 4-5 years before employment is back at pre-crisis levels in developed countries Food supply growth fell short More and more countries are expected to further unwind both monetary and fiscal support measures Fiscal policy needs to be redesigned
IMPACT ON INDIA IMPACT OF US DOWNGRADE India is likely to witness volatility over the next few days and the market may trade lower. It is expected a 5-7% downward impact on the domestic market. OUTLOOK FOR INDIA India will outperform on downside, it is expected next year to be very good, as rates will peak and inflation will ease. There may be even 20- 25% returns. ON DEFENSIVES Valuations in defensive stocks are too high. ON INFRASTRUCTURE Infrastructure stocks are waiting for interest rates to peak. After that, you can start buying. But they will do well in the next two year. ON INFORMATION TECHNOLOGY IT is one sector where historically large-caps have broadly delivered. the IT industry is doing well in 9-12 months.
CONCLUSION U.S the strongest economy on verge of economic crisis Adverse effect on share market Fear of double dip recession materialising Downgrade in U.S affecting European nations