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Dangers of investing in this rally
Mon, 8 Nov Pre-Open

Emerging equity markets have been on a tear since early last year. It was after the US Federal Reserve had let loose its purse strings. It has been printing and doling out cheap dollars to the financial system since then. And recently, it just doubled up on its efforts when it announced its second round of quantitative easing (or QE2).

What this easy money floating around the world financial system has done has taken emerging market stocks on or near to their lifetime highs. Take the case of Indian markets. The BSE-Sensex has already breached its all-time high closing levels and is now just shy of crossing its all-time high or around 21,200. And the party isn’t showing signs of ending anytime soon. This is clear from what some global equity experts like Mark Mobius are saying.

As per a recent interview, Mobius has asked investors not to worry about the world rally in equities. He has instead advised investors to 'jump in' in this rally as he expects stock prices to go even higher. But Mobius has also warned of an asset price bubble, if the rally were to continue for long. In short he says, "...there could be an emerging markets bubble, but feel free to ride it for now."

We are also of the belief that the cheap money sloshing around the world has the capability to take stock prices to even higher levels from here on. But how high, is the question. Stock valuations in India are already factoring in strong earnings growth over the next 2-3 years. And we believe that these valuations are priced to perfection - that nothing can go wrong from here on.

This is a dangerous reason for investing into this rally. We have the example of 2008 fresh in our minds. And if history is anything to go by, we know that it repeats itself.

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