The US Federal Reserve has now put its stamp of authority on the recovery. It says the US economy is “levelling out”. It also points out, “Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.” A combination of weak recovery and loose monetary policy is an ideal setting for high liquidity and rising risk appetite, both of which will support equities.
Further confirmation that the global recession is ending came on Thursday, with numbers that showed that the economies of both Germany and France grew a very modest 0.3% in the April-June quarter.
It’s no surprise then that a survey of investment advisors in the US aimed at finding out the number of bulls and bears shows that the proportion of bulls is now 49.4%, while that of bears is 21.3%. That’s a level of bullishness last seen at the end of 2007.
In the Indian market, this rush of optimism has outweighed concerns about the drought, seen in the pullback on Wednesday and the continuation of that rally on Thursday, although short-covering too, had a role to play. There are other reasons for bullishness. As Amitabh Chakraborty, president at Religare Securities points out, the announcement of the new tax code proposals sends a strong signal about the government’s commitment to reform.
The industrial output numbers have provided hope that the momentum in industrial growth will offset the impact of drought. Also helping the sentiment was the oversubscription for the NHPC Ltd issue, which shows keen appetite for public sector stocks and will help spur the government to go in for more disinvestment.
Most analyses of the market look at how far we’ve rallied from the March lows. But there’s also another way of looking at it—let’s consider how far below we are from the heights scaled in 2007-08. The accompanying chart compares various markets on this basis. It shows that while the Sensex is now 27% below its peak in January 2008, China’s Shanghai Composite index has much more ground to make up, being down 49% from the top it made in October 2007.
At the other extreme, Brazil’s Bovespa index, at close on Wednesday, was a mere 15% lower than the heights it scaled in December 2007. Seen from that perspective, the Indian market is in the middle of the range and we still have some way to go before approaching the bubble territory.
On the other hand, why is it that, when everybody is saying that China and India are the growth stories, it’s Brazil’s index which is the closest to its all-time highs?
To be sure, it’s still far from clear whether global recovery will be robust, but the recovery in stocks in the last two days is a signal that liquidity will continue to provide support to the market.
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