Subprime woes erupt in US, but India, Japan hit most

Though the US market is in the epicentre of sub prime crisis, Japan and India have been the worst affected.

A dipstick study into the movements of select Asian and European markets infers that Japan’s Nikkei and India’s Sensex have shed 12.4% and 10.13% respectively over the past one month; the American Dow Jones Industrial Average Index has only fallen 5.49% over the past one month.

Concerns over a crisis in the US sub prime lending market - where loans are offered to borrowers who do not qualify for market interest rates because of poor credit history - had sent global markets into a tailspin since the mid-week of July.

The current sub prime meltdown in the US is consequential to scores of sub-prime housing loan defaults that began in late 2006 and has continued into 2007. The sharp rise in sub prime credit defaults has caused several major sub-prime mortgage lenders to shut down or file for bankruptcy, leading to a general market downtrend and negative sentiment.

Though most equity analysts maintain that there would be `negligible indirect effect’ of sub prime credit defaults on emerging and distant markets in Asia and Latin America, the cumulative impact has been drastic. For instance, since July 25, FIIs have sold around Rs 9741.40 crore in cash market and about Rs 3132.06 crore in the derivatives segment.

In terms of FII retreat, India, Taiwan, Korea and Thailand have been the worst affected markets in the world. China, even though with huge exposure to the US market, managed to log positive gains at 22% over the past one month.

Lalit Thakkar, director - research, Angel Broking opines that the sub prime fallout is a bigger burden for the US economy but the irony is that emerging markets have corrected more than American markets. “India receives sizeable FII inflows; within FIIs, we also get money from hedge funds.

While it has always been difficult to quantify how much influence hedge funds have on stock markets, the fact remains that time again, hedge funds owing to their over-leveraged positions have lead to liquidity issues,” he adds.

According to analysts, the trouble starts when large-sized funds (with exposure to highly leveraged sub prime markets) start liquidating their holdings in emerging markets to make good their losses in a sinking sub prime market.

In the case of Chinese market, FIIs are not allowed to pull out money at their whims and fancies; there is a lock-in period for staying invested in that market. Japan has fallen more on accounts of yen instabilities while Dow and FTSE have fallen marginally because of timely central bank intervention, say analysts.

“Whenever hedge funds start making losses, they temporarily exit from profit-making destinations. This time round, it was more of an uninformed fear-led sell off from foreign institutions. One cannot blame them (hedge funds) as the risk premium on equity investments has been rising and there could have been tremendous pressures from investors to pull out of emerging markets,” said Amitabh Chakraborty, president - equities, Religare Securities.

“Sub prime fears have clearly been factored in by Indian markets; In fact, politics has overtaken sub prime fears in Indian markets. If what we know is right, most FIIs would adopt a wait and watch approach till the government reaches a firm decision on the nuclear deal,” said a senior official of an Honk Kong-based investment company.