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Socioeconomic shifts & Implications for India

It has been noticed in the past that shifts in the socioeconomic environment are early warning signs of upheavals in the broader economy. Events around the world indicate a distinct shift in public mood which will have profound bearing on people’s attitudes towards stocks Vs bonds and capital protection as against rent seeking.
 
-          After ending the liberal democrats fiefdom in Japanese politics on promises of fiscal consolidation, Prime Minister Hatoyama has resigned today in the midst of public anger over broken promises in the election campaign. This could be an early indicator of rising public anger at the government’s inability to turnaround Japan’s deflationary spiral . This could have profound implications for one of the largest savings pools in the world, with implications for carry beneficiaries like Brazilian real, EM Equities, AUD & NZD.
-          On the other side of the world Prime Minister Cameron in the UK is going to find the same issues crop up a few months from now. After having thrown out the Liberals in a historic verdict a couple of months back, he is likely to discover there are no easy solutions to years of fiscal profligacy. Since cuts in entitlement benefits are going to be extremely difficult to push through, protectionist measures are likely to come to the forefront. We have got early warning signals of this with TCS’ $400 mn deal coming under scrutiny.
-          Public demonstrations in Greece in the wake of austerity measures announced by the government are warnings of times ahead as entitlements get cut one at a time to prevent a bond default. There could be a structural shift in the European countries’ pension fund allocations to equities as reducing entitlements and rising debt servicing costs as a % of disposable income force a switch from longer term equity allocations to cash conservation strategies amongst the larger population, hence impacting capital flows into EM equities.
-          The China Daily reports today that the US Department of Commerce has slapped 136-145% anti-dumping duties on Chinese steel gratings. The more the Chinese dilly-dally on Yuan appreciation the more the risks of a full fledged trade war escalate around the world. In such an event there is a tremendous risk of excess capacity diversion from China to India thus affecting metals & capital goods sector in the coming months. It would seem that the risk currently perceived in Capital Goods is of execution and not of margins.
 
Key Event Parallels from the Great Depression
-          A shift to right wing politics is the most visible parallel today, though admittedly there are no parallels to Hitler in the world today!
-          Every major country devalued their currencies or left the gold standard between 1929 and 1937, the US devalued from $20/Oz to $35/Oz, however this was not sufficient to bring a sustainable recovery in the global economy.
-          A marked rise in protectionism, Smoot Hawley tariff was passed in 1930, imposing a 40% tariff on imported goods (a lot lesser than 135% for sure!!)