It's hard to disagree that the world is becoming an ever more precarious place. Our stock markets are an ardent disciple of the maxim. They have predictably become more unpredictable, but from on overall domestic prospective, we are lucky to be fundamentally stronger. India's gold reserves (Indian household gold holdings labelled by many as practically useless) as per the World Gold Council stand at 20,000 tonnes, which at the current prices come to a holding of around $1 trillion. Interestingly that translates into a 3 times more gold held in value terms compared with the amount of the India's household investment in our domestic bourses. Applying simple economic theory, a modest interpretation is that as a nation we are hedged against any stock market thump, and miraculously stand to benefit in the event.
The world has almost lost a decade to the looming financial crisis. It's safe to assume that we are in the midst of protracted period of recovery, and interest rates globally are anticipated to stay benign/ fall even further before they actually head north convincingly. EU, Japan and even Switzerland now sport negative interest rates. A natural corollary of this aberration for depositors in the Swiss context has been escalating costs to keep their "wodges of Black money" safe in the wake of "substantially high negative rates". Looking back, Switzerland positioned itself as a Mecca for black money, with a 1934 law making it an offense for banks to disclose a client's identity. Switzerland's status of being reticent made it a magnet for political black money. After 2008 crisis, the world has become less tolerant to such gibberish, and the invisible cloak of anonymity is coming off, an immediate effect being the shrinking Swiss Banking Industry. A third of Swiss banks are expected to be out of Business as this idea is pushed further. Being an advocate of fair play, I see this as a constructive step that can pan out well for the global economy. This can pave a way of success for the tax amnesty schemes in the US, Europe and even India, more so at a time, when our deficits are increasing, and we need to increase revenues without pushing for more austerity.
We have long adjusted to the reality that dollar is supreme. It is the only currency with its own "Index". Every currency and commodity in the world is quoted as its function. Although the current strength of the dollar is majorly a consequence of the weakening EUR, GBP, JPY and CNY etc (read Euro crisis, Brexit, Japanese recession and the decelerating Chinese giant respectively), but given the current structure of the Global economy, it seems a safe assumption that there will be no major challenger to the growing dominance of the dollar even in decades. The odds are in favor of a dollar strengthening as it stands to gain in the event of the weakening global economy (read safe-haven buying), or the imminent FED rate hikes ( as per the Fed Fund futures rates). For obvious reasons, the strong dollar will create headwinds for the US economic recovery, as a stronger dollar challenges the domestic manufacturing units against the ever increasing competitiveness of the rest of the world, and the US Industry is forced to retort to "other" means like automation and lay-offs. Considering a zero sum game in a global prospective, an immediate consequence is that it presents an opportunity for the developed and the developing world to fill in this void. As a result of weakening China, supported with Mr. Modi's "Make in India" crusade, India can certainly benefit from it
In the last few decades the world has witnessed Liberalization, Privatization and Globalization as a definite prescription for prosperity. But there is no medicine without side-effects. In all, the highlighted themes of Indian Household gold holdings, the failing Swiss Banks, and the strong dollar present more opportunities at least from India's prospective. Let's brace ourselves to make the most of this opportunity.
Guest Author
The author works as AVP,FX & Derivatives, EMEA with GE Corporate Treasury.
