BackA method in the madness
A method in the madness
PremiumIllustration: Jayachandran/Mint
The global economy is staging a remarkable recovery. The JPMorgan Global Manufacturing Purchasing Managers’ Index rose in April to its second highest level in the history of the series. International trade is reviving. The orders-to-inventory ratio has gone up, suggesting that manufacturers will need to increase production. True, the data for China suggests a slowdown in the pace of expansion, but that’s a good thing given signs of overheating in that economy. In India, recent manufacturing as well as services data indicate that a strong recovery is on.
Yet, the equity markets seem to be unenthusiastic. Only the US markets have done well this year. The Sensex has been trading in a tight range. This is due to several reasons: the very strong rebound in the markets last year, the huge disinvestment and initial public offering pipeline, high valuations and concerns about the beginning of the monetary tightening cycle. More recently, markets across the world have stumbled on worries about the fallout of the fiscal crisis in Greece, a slowdown in China and threats of banking reform in the US. The current pullback may also be simply because fund managers’ cash levels had reached very low levels while risk appetite had soared, as seen from the Bank of America-Merrill Lynch survey of global fund managers last month. That’s usually a signal to take some money off the table.
That said, liquidity should continue to support asset prices. It’s very likely that the downside risks to growth and subdued inflation will keep monetary policy loose in the developed world. To be sure, policy will certainly tighten in emerging economies, including India. But as a recent International Monetary Fund report has said, global liquidity is five times as important as domestic liquidity for determining stock returns in emerging markets.
What are the risks to the global recovery process? Tell us at views@livemint.com
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
