"Every form of addiction is bad, no matter whether the narcotic be alcohol or morphine or idealism," said Carl Gustav, the noted Swiss psychologist. Well, if Gustav were to be alive today, he would have definitely added 'money' to his list of addictions. Given the way central bankers are working overtime around the world to make sure that the recovery is never short of money, the 'medium of exchange' surely has become an addiction!
Recent developments in the US, including the deterioration in job and financial markets, have increased the uncertainty surrounding the recovery. And with the Euro zone also involved in a serious debt crisis, it seems clear that the pain hasn't ended as yet. In fact, some experts like Nouriel Roubini and Marc Faber are even hinting at a prolonged economic slowdown worldwide. Then, there are fears of bubbles building up in emerging markets stocks and real estate.
We are not trying to act as fear-mongers but just talking about the economic realities that bull markets generally help fade.
Take for instance the bubbles that are said to be building up in emerging markets, where the effect of free money is remarkable. One clear case in point is China. Some economists have raised alarms about rapid stock and property price increases in China. The dragon nation has seen its economic growth rebound quickly in 2009, and this has attracted money from slower-growing economies of the West. This money has fueled speculation in China's stock and realty markets.
Now, apart from issues in valuations of stocks and properties in China, another concern experts have is of the sustainability of the economic recovery there. After all, this recovery is largely built up on cheap global and Chinese money. And as The Economist says - "Something's got to give."
Coming to India, while there seems to be no talks of bubble here, stock and realty valuations have moved sharply up from their lows of early 2009. And it's got really difficult to find real bargains now. Over that, investors are now feeling the jitters of rising inflation and the likelihood of higher interest rates in the future.
So, is something's about to give in here as well?
See, there is no denying that certain pockets of India's real estate market, like Mumbai for instance, are seeing a bubble like situation. But will this burst now or still build up further is anyone's guess.
When it comes to stockmarkets, of course valuations have reached high levels (notwithstanding the recent crash in prices). But again, we cannot say the markets' current state as that of a bubble. The Indian economy and companies are still in the early stages of their evolution. There is tremendous demand potential that will keep the economy chugging along for years to come. And when it comes to stockmarkets, it is staring at a huge potential in terms of a getting a larger share of Indian households' huge savings.
So while markets might fall down even further from here on, we believe investors must not fear this correction. After all, post a sharp rise in stock prices we saw in 2009, a correction this year should be expected and not feared. Corrections are just a normal part of stock markets and do not alter the overall bull market trend. And given the way India's economy and companies are evolving; the markets will definitely be in for a good time (notwithstanding the normal hiccups) over the next 5 to 10 years.