India might profit from US downgrade as haven for fleeing capital

NEW YORK, Aug 7 - The Indian stock market is likely to seependulum-like market swings and heavy bouts of volatility when it resumes trading on Monday due to the unprecedented downgrade of America’s sterling sovereign credit rating, experts said Sunday.

India might even profit from the downgrade, because capital fleeing troubled markets in the West will find safe haven in emerging markets but Indian investors will get imported volatility in exchange.

“Volatility is back for a while but Chinese, Indian and Latin American equities are now more attractive investment destinations than those in the West. Refugee capital which seeks a safe haven in times of economic uncertainty, of which there is plenty in the United States and Europe will flow to high-growth emerging markets,” said Wall Street hedge fund manager Chris Langley who looks at emerging markets.

Georges Ugeux, a former New York Stock Exchange executive vice president who now runs boutique investment bank Galileo Global Advisors, told Firstpost Standard & Poor’s US downgrade may lift borrowing costs on a variety of debt around the world, although perhaps not enough to do serious damage.

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“India might benefit in the short-run from an optical point of view but from a longer fundamental point of view the weakening of the US economy is not good news for anyone,” said Ugeux whose New York-based investment banking advisory firm has a direct focus on emerging markets.

“You need the world’s largest economy to stimulate growth around the world. Despite the concerns I think the move will be neutral for Indian exports and will not impact India’s economy in the grander scheme of things,” he added.

Standard & Poor’ssaid the US downgrade was based more on the view that the effectiveness, stability and predictability of American policymaking had eroded during the rancorous debate over lifting thedebt ceiling. It is hardly surprising then that skittish American investors are now looking for safe havens as they see the worsening economy casting a shadow over President Barack Obama’s re-election prospects next year.

Opinion polls show Americans are increasingly worried about the economy and pessimistic about the future of the country with 15 months to go before the 2012 US presidential election.

“The US debt crisis is overblown. Even after the downgrade every country said their trust in American Treasuries remained unchanged. But there is politicking because of the election cycle,” Krishna K Gupta, general partner inMassachusetts-headquartered Romulus Capital, told_Firstpost_.

“However, the fundamentals of the US economy are weak and that will have an impact on India, especially the information technology and services sector. But will the debt crisis have a lasting impact? Not fundamentally. There will be some volatility, but no long-term impact. The fundamentals of the Indian economy remain unchanged so it will be an attractive market. In the short-term, emerging markets like India may attract more capital flows from developed markets like the US and Europe. This is already happening and will be accentuated,” he added.

Foreign investors are scared and they’re moving into Treasuries, German Bunds and cash as safe havens. Money is also likely to flow to stable Asian and Latin American markets.