| It isn’t only the Sensex that is breaking records—on Tuesday, benchmark equity indices in Indonesia, Australia, New Zealand, Mexico and Brazil all soared to record highs. On the same day, the Reuters CRB Commodities Index touched a 23-year high.
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| Gold continued to hover near a 16-year peak, while the US dollar plummeted to another low against the euro. Global liquidity continues to drive the rally, seen clearly from the rise in net FII inflows into the market.
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| With the US election out of the way, the same liquidity has been pushing up markets across the world, and the MSCI World index was up 3.1 per cent in November, compared to a rise of 4.3 per cent in the three months to end-November.
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| The US government’s policy of talking the dollar down has added to the attraction of non-dollar assets, and emerging market equity markets have comfortably outperformed the world index.
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| The MSCI Emerging Markets index was up 5.1 per cent in November, compared to 5.6 per cent for the quarter ending November 30. Clearly, global liquidity remains strong, despite interest rates being tightened in the US. The explanation probably is that the tightening has been mild, and US interest rates are still below inflation.
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| That essentially gives players like hedge funds a free lunch, allowing them to borrow at negative real rates to invest in assets across the world.
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| At the same time, it must be emphasised that the “fundamentals”, both globally and in India, are also strong. Global growth has been robust this year, with the latest upward revision in the US third quarter GDP data confirming that the world’s largest economy continues to perform its function as the global growth engine.
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| On the other side of the world, Chinese economic growth is estimated to be above 9 per cent this year, scotching fears of a slowdown. Back home, the recent second quarter results underline the fact that earnings growth continues to provide a solid basis to the current market rally.
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| Nevertheless, it would be wise to be cautious. The reason is that the global rally has been built on the basis of imbalances, with record US current account and fiscal deficits fuelling export growth in other economies.
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| Since China accounts for a big chunk of exports to the US, the money earned from exports has fuelled an investment binge in China, with a property bubble developing in some coastal cities.
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| Low interest rates have also led to property booms in other countries, ranging from the US to Australia. Nobody knows how these imbalances will correct, but the fact is they are a looming cloud over the markets, and investors should be watchful.
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| They would be advised to keep an eye on US interest rates, which might climb further, and a possible end to dollar depreciation, which could affect inflows to emerging markets. In the meantime, Indian companies should use the opportunity to mop up money for investments.
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| Given the appetite for Indian assets among foreign investors, this could be the right time for the government to float investment companies for infrastructure development, as the Chinese authorities have done so successfully. |
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