Soaring optimism

But are the stock market signals to be trusted?

When the stock markets suddenly took off three months ago, it looked initially like a bear-market rally that would soon fizzle out. As the rally became a sustained, broad-spectrum uptick, various other reasons were trotted out—including, in India, the unexpected outcome of the elections and the routing of the Marxists. Now it is clear that the upturn has been there in all the emerging markets, and that it signals a fundamental change of mood. Investors seem to have concluded that the worst of the worst recession in 80 years is over, and that the only question to be answered is whether the recovery will be fast or slow. A second school of thought argues that the sharp market upturn (varying between 30 per cent and 70 per cent in different countries, counting from January) has been the by-product of all the liquidity pumped into financial markets by panicky governments; the sharp spurt in crude oil prices and in the prices of several metals (like aluminium) is cited as further proof of a liquidity-driven hunt for assets to buy.

For those determined to hunt for good news that justifies the stock market’s optimism, there is no shortage of options—ranging from the lower jobless data in the United States and the near-normalcy in some corners of the once frozen debt market to the fact that the US government might even make money on the investments it dished out under its troubled assets programme (though that was not the intention). To be sure there is still a lot of bad news floating around (auto sales are flat, retail sales are still down, only cheap housing finds buyers, etc), and the corporate results have not been great, while global trade has continued to shrink. Yet the Baltic shipping index has nearly doubled, as though the facts have nothing to do with what goes on in markets. Indeed, it is hard to understand why even oil prices should be climbing when the global economy is still firmly in the grip of a recession and will remain that way till the end of the calendar year, as the International Monetary Fund has forecast.

There can be little doubt that most Indians will now consider the stock market at least a tad over-valued, given the fact that the latest round of quarterly results announcements is nothing to cheer about, and GDP growth in 2009-10 is still pegged at barely 7 per cent (not much more than the last financial year). But beauty is in the eyes of the beholder! However, it is useful to hark back to when the Bombay Stock Exchange’s Sensex first crossed the 15,000 mark—almost exactly two years ago. That was a period of boundless optimism, reflected in the index spurting to 21,000 (or by 40 per cent) in double-quick time. The market sentiment today is mercifully more cautious, with many more investors willing to hedge their bets at a time of turmoil. They have no choice, since being a bear in the market appears to be a grub place if the bears don’t be lonely.