Why stocks may go up despite negative global cues

Apr 12, 2011

In this issue:
» Bernanke needs to pay heed to gold
» China's inflation could get out of hand
» US Fed is still in denial
» Telecom to see a wave of M&As
» ...and more!

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If one were to take stock of what is happening in the global economy, there is not much to cheer about. For starters, oil prices are rising on account of the disruption in the Middle East and North Africa. Japan is still struggling to cope in the aftermath of the devastating earthquake and the consequent damage to its nuclear plants. Pressures continue to exist in the Eurozone with mounting debt and likely sovereign failures. The US has not yet successfully dealt with the problem of unemployment and has been resorting to quantitative easing on a large scale, the benefits of which have largely been short term in nature. The US budget deficit in the meanwhile has ballooned and there is a risk of a US Treasury market sell-off. Emerging markets such as India and China are seeing interest rates harden as governments there are looking to tackle inflation.

So, while it is obvious that all is not looking too well with the global economy, the global equity markets have painted a different picture. Equity markets have, in fact, rebounded sharply since mid March. So why have stock markets performed well despite so many negative factors? There could be several reasons for this. For one, governments in the West are throwing money at their problems at an alarmingly brisk pace. This has led to liquidity increasing. As a result more and more money is finding its way into equities. That's not all. Since interest rates in the developed world continue to remain low, there is not much incentive for investors to invest in other asset classes.

Also, investors seemed to have priced in many of these negative cues. In fact, some of the concerns are not looked upon as significant risks. For instance, not many perceive high oil prices as a worrying factor unless it touches the US$ 140 a barrel mark. Reconstruction in Japan is expected to be positive for the global economy as investments there increase. Again although company earnings are not likely to be sustained at the strong levels seen in FY10, they are still expected to be on the higher side. All this has therefore sparked interest in global equity markets. In India too, interest in stock markets has revived after inflation concerns and prospect of low corporate earnings dampened sentiments last year. While volatility could still persist in the Indian stock markets in the near term, the Indian growth story in the long term remains strong and strengthens the case for investing in good quality stocks for a longer horizon.

Do you think stock markets will rise despite negative global cues? Share with us or post your comments on our facebook page.

 Chart of the day
Although India's economy is expected to grow at a strong pace, its industrial production figures do not give reason to cheer. As today's chart of the day shows, India's industrial production in Feb 2011 was much below that of its global peers. While this is just a one month picture, further slowdown in the coming months would certainly give the Indian government more to worry about.

Data Source: The Economist

Even as prices around him keep rising day by day, Ben Bernanke refuses to wake up and smell the coffee. In other words, he refuses to acknowledge that inflation is indeed going out of hand. And where does he get his feedback about inflation from? Well, it is from the Consumer Price Index (CPI) numbers in the US. Experts argue that the CPI data have continued to show low inflation in spite of all the evidence around. This is because housing prices get a huge weighting in the US CPI calculations. Thus, with the housing prices remaining depressed, CPI has also continued to show low numbers. The CPI was not always like this. Over the years, a lot of adjustments have been made to how CPI is calculated. The end result being a grossly misrepresented CPI. And it is the blind belief in this CPI that has led Bernanke to believe that there is no inflation.

We believe that Bernanke would have been a lot better off had he heard what the gold prices were telling him. Over the years, correlation between gold and US CPI was indeed quite a strong one. The relationship though broke down in 2006 and not because of any fundamentals, but because of random changes that were made in the CPI. Hence, it is time Bernanke starts listening to the price of gold rather than base his decision on the wrongly calculated CPI.

China's woes with rising wage rates have attracted sufficient newsprint in the past few months. But if legendry hedge fund investor George Soros is to be believed, the problem has just begun. Indian policymakers may be going red looking at China's enviable trade balances. But the oriental economy itself knows for sure the risks that are in the offing. Soros believes that the 2008 crisis had offered China a brilliant opportunity to contain inflation. Allowing the Yuan to appreciate against the US dollar could have taken care of the price rises. But China's growth obsession took the better of it. Today with the rest of the world criticizing China for its faulty currency policies, the economy has but itself to blame. If the Indian central bank raised rates 8 times in the past fiscal, its Chinese counterpart has used monetary tools 10 times to check liquidity. But neither have had much luck with the rate rises. As the Indian government struggles to address the supply glitches, China too cannot sustain its growth rates while giving in to inflation pressures. With rising import bills, China's inflation problems could very well get out of hand.

"We're on steroids now," says Stephen Roach, Morgan Stanley Asia's chairman emeritus. He is referring to the US economic recovery or lack thereof, and the Federal Reserve's role in the process. He blames the low interest rate environment from 2003 to 2006 for the 'real estate bubble'. This subsequently led to a meltdown of epic proportions in 2008.

Roach states that the US Fed is still in denial over the role that its poor monetary policy decisions played in creating this "monster" crisis. And Ben Bernanke is not doing much to quash the problem. He is rather adding to the mess. Externalities like Euro debt crisis, the Middle East problems, Japanese natural disaster etc. happen from time to time. Nothing can be done about it. But, the US needs to look within and see what problems it can fix in its own backyard. These include consumers and businesses repairing their balance sheets. Policymakers need to be careful on how they deal with current budgetary expenses and not overdo it. We along with Roach believe that the US government should be more like the ant than the grasshopper in Aesop's Fables. The ant spent the summer looking for food, while the grasshopper lazed around. And you can tell who had food and comfort during the harsh winter months. The US needs to save some ammunition in case it gets into another 2008 like mess.

In the coming times, the telecom sector could witness a wave of mergers and acquisitions (M&A). It seems that the new national telecom policy that is expected to come into effect by the end of 2011 will ease rules on M&A. Communications minister Kapil Sibal has hinted that the rules could be eased provided there were at least 6 telecom players after any deal in a service area.

At the moment, India is divided into 22 service areas. And there are about 9 to 14 mobile-phone operators in each of these areas. According to the existing rules, operators cannot have more than one license in an area. As a result, they cannot buy out rivals that have operations in the same service areas. Given the stiff competition in the telecom industry, many players are facing severe pressure on the margin front. If the new policy does relax M&A norms, it will augur well for the big telecom players.

Indian markets remained closed today on account of Ram Navmi. Most major Asian markets were trading in the red today at the time of writing with Japan and Hong Kong trading lower by 2% and 1% respectively.

 Today's investing mantra
"A market downturn doesn't bother us. For us and our long term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short term investors and market timers, it is a correction not an opportunity." - Warren Buffett

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5 Responses to "Why stocks may go up despite negative global cues"


Apr 16, 2011



shrishti sunil

Apr 13, 2011

I totally agree with the view points...Adding on to it, most of the indian investors they actually dont know abt the market facts and figures..they just invest b'coz they see others investing into the market. If the oil prices go down it wont effect them or change their opinion abt investing in the market.the purchasing power of people is high and so they put on their money into the market..



Apr 13, 2011

I believe Indian stock markets will definitely go up during second half of this year if the planned Lokpal Act is really passed by the parliament as it will mean a start for the reduction in political & beurocratic curreption which is responsible for sluggish investments in vital sectors of our economy.


Rakesh Sethi

Apr 12, 2011

As regards why market is moving inspite of negative news in the market. Certainly I will be accept your views, apart from that in Indian Market, you are well aware of the facts that, final result going to start and expected excellent nos in ahead against the last, secondly we have seen a purchasing power have been increasing of Indian which is resulted more and more buying in the market by way consumer good, article, house hold, Cars etc. which ultimate reflect in the Result of the Company, thirdly INdia is a great potential in the next 30 years and a lot of infrastructure project are coming which ultimate require of Power, Cement, Steel. Crude is moving but I think that this is a past, people do not worry about the Crude and they are investing in capital market, real estate and other avenues, which can deliver a good return.


vijay viragi

Apr 12, 2011

The situation is almost similar to that of 2007 sub prime crises. Every thing is going up, Agriculture commodities, Gold, Silver, Property, Equity. I have One question which has been bothering since Lehman Brothers collapse. Does the Printing of Money solve the Economic problem? If YES then why should we worry. Just start printing more and more. If NOT then why are Governments doing this ?

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