The Dow Jones ended flat Tuesday. Gold was up slightly and oil was also marginally higher. Overall, a rather uneventful day except for one market — bonds. The 10-year bond yield fell by nearly 10 basis points. It now hovers around 2.2 percent. Just a few weeks ago it was near 2.6 percent. This is a very ominous development in the global markets.
As you all know, bond yields have an inverse relationship to bond prices. The yield falling means price for bonds are going up, which means a lot of cash is being pulled from the stock markets and being pushed into the bond market. This usually occurs when we have investors getting nervous about economic growth and parking cash in safe investments.
There are many reasons for such fear setting in. Slow growth across the globe is one major factor. Europe is a complete mess and we just saw Germany reduce the forecast of its GDP growth quite a bit for 2014 and 2015. The geopolitical situation with Russia has taken its toll on Germany. The International Monetary Fund has lowered expected global GDP growth rates down again on the fears of Ebola spreading and drastically reducing growth in affected countries. The constant battle of the world powers against ISIS has fanned the flames of slow growth as countries focus on battling terrorism.
Over in Brazil, there was an amazing turnaround in the fortunes of the current president in elections held last week. President Dilma Rousseff, who was trailing in the run up to the elections, surged at the last minute to take the lead, but not enough to win outright, forcing a run-off election later this month. The market shuddered and plunged as the news spread. Despair spread as the economic powers braced for another term of irrational and market-unfriendly policies. The Brazilian real and stock market plunged. Any hopes for reform seem to be heading for defeat in Brazil.
China on its front is grappling with twin challenges — stubbornly slow growth and a real challenge to the Communist Party from Hong Kong. The weeklong protests by the students in Hong Kong brought back memories of Tiananmen Square. The biggest fear that haunts the Communist Party is a revolt that it cannot control. With extensive media coverage, China is now trapped somewhat and is working to handle the situation behind the scenes.
India seems like a mirage in the desert compared with all this turmoil across the world. The government of Prime Minister Narendra Modi is risking over-promising "golden days" to the masses and the world. But they are definitely on the right track and beginning to clean up India. To add to the glory, we now seem to have a real leader at the Reserve Bank of India. Governor Raghuram Rajan has made an excellent start and his bold moves are beginning to show results. The markets are now well-choreographed and we are seeing fewer surprises, as evidenced by lower 1-year interest rate moves on the day of policy announcements.
As a result, I would continue to expand my portfolio to include stocks from India as well as companies that have large exposures to India. It is one of very few places with real promise left anymore these days. Of course, no country can grow if the word around it is collapsing. So the investment will pay off as long as the global economies do not go into a tailspin.
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