Equity markets across the world seem to be on steroids. Almost all of them have risen about 20% in the last 2 weeks. The US Dow Jones has just recorded its best 10 days since 1938. The Indian Nifty has risen 500 points from 2525 to 3025 in exactly 11 days. Is there something cooking? Are the bad times over, and will everything else be back to the good old days? I fear not (note that I am speaking specifically for the Indian markets). Reasons follow:
For one, I dont think the real economy has really bottomed out. Indian FY09 Q3 GDP growth was 5.3%, but looking at monthly statistics on exports, IIP or bank credit, it does not seem as if this is the end of economic deceleration. True, the markets discount everything around 6 months in advance, but it seems to me that we have not really suffered yet for the sins of our government (12%+ fiscal deficit!! a dubious record)
Secondly, 2 weeks ago, I distinctly recall multiple investment banks and brokerage firms (CLSA, Kotak, ML, Morgan Stanley, self styled 'experts' on CNBC TV18 etc etc) shouting from the rooftops about an imminent fall to 1800-2000 on the Nifty (ie a 20-25%) fall in the market. In 2 weeks, the world has not suddenly changed. The fact that these dudes are now saying the worst is over is perhaps the best indicator that its not
Thirdly, mature markets in the US and Europe are trading at lower valuations (many companies at bankruptcy valuations) than those in India. The governments there are inviting private investors to partake in the upsides while limiting the risk substantially (this is essentially the $1 trillion 'bad assets plan'). So there are better investing opportunities in mature markets, thus automatically limiting fund flows to emerging markets like India
Fourth, and perhaps most temporarily, there is a huge overhang of potentially disastrous electoral results in India very soon. Who wants to bet money on an uncertain outcome?
Predicting the markets' direction is akin to putting your foot in your mouth. For all these reasons, the markets may still run up substantially from here. But I'm not betting on it!
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3 comments:
Rightly said. People have even forgotten Barclay's 17% forecast for inflation (when it was rising and at 7 or 8%). But the Barclay's report was much touted everywhere.
But strange thing is that FII figures for last 10 sessions have been decently positive.
You may want to read Martin Armstrong's economic theory. If you don't agree, at least for entertainment value
US and European markets are reacting to the latest stimulus package.. they are definitely oversold even by depressed valuations but now is not the time for a sustained upswing..
All this euphoria is abt the toxic asset removal stuff which if actually gets done.. will unblock the system and let it start from scratch.. the country risk will ofcourse go up but it's super unlikely to lose its AAA rating..
the flipside is that any toxic asset purchase while freeing up the B.S will create large immediate writedowns.. question for banks is whether to take down a lumpsum or leak money for longer... it all depends on the valuation they get.. if banks choose not to sell these assets.. we stay where we are and the markets will crash.. Puts anyone?
As to India... its all future potential :) there really isn't much of a story in current valuations to sustain the current levels.. but if the world thinks its recovering then its good news for India..
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