Will 2008 equity crash be repeated in 2018?

Many investors are worried whether the 2008 episode of the equity market crash will be repeated in 2018. Global economic crisis in 2008 led to a major fall in global equities including the Sensex, which crashed 60% from the peak of 21000 mark. However, the ongoing trade war is unlikely to cause a major fall in the global economy or equity markets.

Of course, the global debt is also constantly growing -however, the major economies of the world have a lot of monetary and fiscal tools to postpone the crisis, maybe by 5-10 years or even beyond the 10-year period. The US has already come of quantitative easing and it is also more than halfway through in tightening the interest rates. Europe and Japan already started talking about the withdrawal of monetary stimulus. These economies are in a position to go back to both fiscal and monetary stimulus if needed. Some of these major economies have also improved their GDP growth rates recently.

Now the US is planning tariffs on all Chinese imports of $430 billion (on FOB). As per the global analysts, the maximum damage for the Chinese GDP growth could be around 0.5% (50 bps) as total Chinese exports to the US constitute only around 3.4% of Chinese GDP.

In fact, an all-out trade war would eventually diminish the long-term spending power and welfare of the US consumers. Further, the Chinese operations are a major profit driver for the leading US multinational corporations—from cars to coffee shops. Any hit to these businesses within China would impact adversely the performance of these US companies. Moreover, the share of exports of goods in China's GDP has fallen from a peak of over 35% in 2006 to around 18% in 2017. The share of goods exports to the US in Chinese GDP has also declined from a peak of 7.2% in 2006 to 3.4% in 2017. Exports to the US estimated to have grown at 22% during 1998-2007 but slowed to less than 7% in the most recent decade. Therefore, $12-trillion Chinese economy, with forex reserves of over $3 trillion, would overcome this adverse condition with limited impact. In fact, the US might be forced to compromise on China or on other economies eventually to minimise adverse impact on its own economy.

On the domestic front, the rupee and oil price remain as a cause of some worry – however, continued double-digit banking credit growth, significant recovery in exports, manufacturing sector and, crop area, containment of inflation, almost peak out in public sector banks' NPAs, etc would provide a lot of comfort to the domestic economy. Hence, neither global equities nor the domestic equities are likely to crash in a big way in 2018. Possible risk to the domestic equity markets would arise only if the 2019 mandate forces any national party to depend on a large number of regional parties.

The writer is founder and managing director, Equinomics Research and Advisory