Indian stock markets in a bubble? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Indian stock markets in a bubble? 

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In this issue:
» World Bank raises China's GDP forecast
» India's fiscal position suggests caution
» Obamaspeak hits US banking stocks
» 'Worst is over' for the Indian IT industry
» ...and more!

BSE-Sensex since Jan 2009
Source: Trend
That Dr Doom aka Nouriel Roubini is not seeing any 'green shoots' (a metaphor used to describe initial signs of economic recovery) has been largely publicized in the media in the past few weeks. However, for the first time in many months, he has expressed his views on the Indian economy and its stock market and sadly, it does not make for a very good reading. Speaking to a leading business daily, Roubini was of the opinion that the Indian stock markets along with other emerging market equities may have run up too soon too fast and there is a potential asset bubble building here. Although he agrees that part of the reason the stocks have rallied is because of better fundamentals in these markets, he remains concerned about the easy-money situation which is pushing up asset prices sharply.

Roubini also proffered his views on whether inflation because of money printing by most governments or deflation because of rising unemployment and lower consumer spending is staring us in the face. He opined that while in the near term, the global economy will be gripped by a deflationary spiral, eventually all the money printing by the government will go into goods inflation, leading to runaway inflation. Hence, in the longer term, it will be the inflation that will act as dampener while the global economic growth will be beset with problems of deflation in the near term. Going by the man's track record, we better take his comments seriously.

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As we remain worried about China's commodity stockpiling that, when over, has the ability to lead to crash in commodity prices, the World Bank has something positive to share with respect to the dragon nation. It has raised its GDP growth forecast for China to 7.2% in 2009 from 6.5% earlier, and has also advised the country's policymakers to delay until 2010 any additional stimulus plan to boost the world's third-largest and the fastest growing economy.

The World Bank in fact joins Goldman Sachs, Morgan Stanley, and UBS in raising 2009 growth forecasts for China after a 4 trillion Yuan (approx US$ 585 bn) stimulus package triggered record loans and surging investment. These projections though come with a caveat - it is too early to call it a sustained recovery given China's dependence on government spending as also the chances of bursting of a commodity bubble that has rapidly built up over the past few months.

Following the sell-off seen in the US markets yesterday, the Asian markets ended today on a weak note, with most benchmark indices closing lower in the range of 1-2%. This adds to the decline that was seen in these markets yesterday on the back of decline in commodity stocks. Today, the culprits seem to be banking and financial stocks given that in the US yesterday, President Obama proposed sweeping new 'rules of the road' for the country's financial system to bring it to task.

Obama has in fact blamed the financial crisis on a culture of irresponsibility that had taken root from Wall Street to Washington to Main Street. The new regulations outlined by Obama's team are likely to give new powers to the US central bank and the Federal Reserve to oversee the country's banking and financial system or rather police the entire financial system for risky products.

The past eighteen months have probably been one of the toughest for the Indian IT industry as clients, especially in the North American and European region, have been cutting down their spending on account of the slowdown. However, logically thinking, there would be a certain point in time when things would take a turn for the better. Mr. Gopalakrishnan, the CEO of IT major Infosys believes that the 'worst is over' as he recently said "Our clients are more confident about the current situation because they believe that we are at the bottom and it's highly unlikely that we see something unforeseen (such as bankruptcies and failures) in the future." However, he also mentioned that demand of outsourcing services will take at least a year to recover. It may be noted that in recent times, other IT companies have also shared similar views as companies around the world are looking to achieve operational efficiency by increasing outsourcing. Meanwhile, IT companies are also foraying into newer verticals and geographies in order to beat the recession in the developed world. Even domestic demands and government projects rank high in the scheme of things.

India's fiscal position is weak. In simple words, it has been spending more than it receives by way of taxes and other collections. To fund this spending, the government has resorted to heavy borrowing by way of issuing bonds and populist measures like subsidies on fuel, amongst others. Despite a new government that was said to be bringing in reforms very aggressively, such populist measures are not proving that easy to do away with. If the government is to give further stimulus to the economy, it will have to borrow more, consequently not only further deteriorating its fiscal position, but also bringing in the risk of further upward pressure on interest rates which will in turn be bad for the general investment scenario in the economy.

Highlighting this very predicament, credit rating agency Moody's has warned that India's fiscal position suggests caution, as the government is not in a position to offer sustained support to a weak economy. Further, most developed countries around the world are still very much in recession. Indeed, things may not be as good as the Indian stock markets have made it out to be.

Worried over the rising import of steel products in India, the government has been mulling over increasing the import duty on steel products from the current level of 5%. Terming the duty to be ‘insufficient’, the steel industry has demanded it to be raised to 20% instead. India has become a preferred dumping destination for global steel mills due to two major factors, rise in domestic steel consumption and lower price of steel products in international markets (due to oversupply). Favouring the increase in import duties, the management of steel major, SAIL, recently gave its view stating that “If the government considers raising the protection level by raising the general import tariff, I suppose that would be welcome at this point."

They stood like a rock of Gibraltar even as the Sensex plunged from 21,000 to 8,000 or thereabouts and this was one of the main reason why the stock market crisis did not turn much worse. These words of praise come from none other than Mr. Bhave, the SEBI Chairman, who was speaking at the Mutual Fund Summit held yesterday and were spoken to extol the commitment of retail investors, who unlike their corporate counterparts did not resort to mass redemptions and put the liquidity scenario under threat a few months back. Mr. Bhave also used the crisis as an example to drive home the point of importance of diversification when it comes to the type of investors. "Under the given circumstances all corporates will tend to behave similarly. The lesson we will have to take home is that if you really want diversity of investors, the potential of non-corporate investors is tremendous", is how Mr. Bhave chose to put it across. We believe that besides improving liquidity, the SEBI Chairman's idea of tapping more mutual fund investors would also reduce our dependence on FIIs, whose fickle nature does not bode well at all for the stability of our stock markets.

The Indian markets ended the day on a weak note with the BSE-Sensex ending lower by around 260 points
(-1.8%), while the NSE-Nifty ended lower by 105 points (-2.4%). Most of the Asian markets ended the day on a weak note as well. At the time of writing, the European markets were trading in the red.

04:55  Today's investing mantra
"Sometimes your best investments are the ones you don't make" - Donald Trump
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4 Responses to "Indian stock markets in a bubble?"


Jun 20, 2009

5 Minutes Wrap up really worth reading !!! Thanx, Very clear indications/mantras ""Sometimes your best investments are the ones you don't make" - Donald Trump"


divan singh

Jun 19, 2009

i have mutual funds of hdfc top 200, birlasunlife infrastructure, sbi comma, birlasunlife frontline equity fund and religare banking sector fund. so i want to know whether i should do redemption or not.



Jun 19, 2009

Being the expert comments should be given by equity
master itself.



Jun 18, 2009

i have mutual funds of hdfc top 200 ,kotak 30, lotus contra fund, reliance equity advantage fund. so i want to know whether i should do redemption or not.

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