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2016 Might Not Be As Bad As Predicted

Monday, January 18, 2016
By Harsh Kundnani

Although ‘caution’ seems to be becoming the buzzword for 2016, this year might just surprise analysts and investors alike, who seem to be overtly pessimistic in the current scenario

It has been barely 15 days since the start of the year and the financial world has already started tagging it as a catastrophic year while journalists and analysts, are fed up with trying to find synonyms for the Financial crisis, the China slowdown, the Oil slump, the Geo-political tension etc, etc. There is no shred of doubt that the global scenario is worse than it seems; as China has been sending distress signals while the events out there could have a snowballing effect affecting the rest of the world, Brazil is in the midst of a financial and more importantly a political crisis, Russia is in the centre of geopolitical tensions while Oil has been hitting multi-year lows causing the OPEC economy to worsen by the day.

According to an IMF report last October, the world is likely to grow at a disappointing 3.1% in 2016, down from the forecast of 3.5% it had set in April 2015. This, combined with the abovementioned concerns has provoked Analysts and Economists alike, to predict that 2016 might not bode well for the Financial Markets. Many analysts have recommended investors to shift their portfolios to safe havens like gold and property as Stock markets across the world could presumabely fall by almost 20% and Oil could slump to $16 a barrel this year.

However, lets play the devil’s advocate out here. Although the situation appears to be grim, history allows us to vouch for the old adage that the best time to be bullish in the stock markets is when everyone else turns bearish. However, one cannot assert such notions without any substantive basis.

Therefore, here are the reasons why 2016 might not be as bad a year as predicted:

  •     China, which experienced a massive sell-off just a week ago, partly due to the slowdown in growth and partly due to flawed circuit breakers, has been slowly and steadily putting out security measures to stabilize the markets which involves suspending the circuit breaker mechanism and halting further devaluation of yuan. Such response from the regulatory authorities has reinstated the faith in the Chinese markets and stalled the downfall as of now.
  •     Russia’s Oil production and its subsequent export has been on the rise since the past few years due to which the dependency of its economy on Oil has increased. It might realise that as Europe is its main customer for Oil, creating any further political tension might not turn out to be favourable for its own economy. Hence, we might witness a relatively peaceful year, without Russia making any headlines on the geopolitical front.
  •     The stock markets of the United States seem to be facing major headwinds, with the Dow Jones shedding more than 8% already this year. However, there seems to be a disparity between the stock market performance of the US and the robust manner in which its economy has been reviving. The fact that the Fed has started increasing rates from last December is a clear indicator that their economy is well prepared to sustain on its own. All in all, we might just see the US once more assuming the role of a knight in the shining armour.
  •     The Eurozone has seen major reforms in the last year, one which has helped to stabilise the financial scenario, if not fully circumvent the crisis. The formation of the Banking Union addresses the shortcomings of the area, with the harmonisation of rules and regulations. That, combined with a change in management of the major banks has revamped the entire landscape of the area.

Shifting attention back to our home soil, India, looks well poised to capitalise the slump in the oil market as well as the downfall of China as the major player in Asia. The fall in oil prices has multifarious positive effects on the economy of India. As the amount expended on subsidies decreases, it gives the Indian government a leeway to increase welfare spending as well as reduces the burden of sharing subsidies on Indian Oil companies. It also keeps inflation in check while consequentially increasing the purchasing power of individuals.

Ergo, although ‘caution’ seems to be watchword for 2016, this year might just surprise analysts alike, who seem to be overly pessimistic given the current scenario.

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