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Shyamal Banerjee/Mint

Shyamal Banerjee/Mint

Ourview | Is the rebound for real?

Ourview | Is the rebound for real?

The year has started off very well for equity investors. The MSCI World Index is up 4.5% this month. Emerging markets have done better, with the MSCI Emerging Markets Index up by 8.6% this month. Indian equities have comfortably beaten both those indices. Fund flows into equities have strengthened. Fund tracker EPFR Global says flows into dedicated BRIC funds have climbed to a 60-week high.

Shyamal Banerjee/Mint

Yet any recovery in the US is likely to be painfully slow, seen from the continuing weakness in housing starts. US exports have started to fall. A recent report by the World Bank has cut the US gross domestic product growth rate. In Europe, the World Bank predicts a contraction this year. The European Central Bank may have succeeded in pushing bond yields lower, but there is still no agreement on the way forward and the difficulties being faced in the talks on restructuring Greek debt are an illustration of how complex the issues are. There is also the concern that the austerity programmes will only exacerbate the problems. And there seems to be no acknowledgement that the crux of the problem may be the decline in competitiveness in the European periphery. In India, core inflation continues to be high, probably high enough to deter any immediate monetary easing by the central bank.

Why then are the markets celebrating? There are several reasons. In the US, fears of a double dip have receded and data has been much better than expected. In Europe, the central bank has been able to ease the financing constraints of the European banks and the peripheral countries, thanks to its three year long-term refinancing operations. And slower growth in China and lower inflation should enable the government to ease policy.

The most important reason for the rebound in equities, however, is that they had been beaten down too much during the panic in the markets and fund managers were sitting on cash. This is particularly true for the Indian market, which, in spite of the recent bounce, continues to be one of the worst-performing markets over the last three months. The global rally in stocks is just a bounce from excessively oversold conditions.

Will the markets be able to sustain this rally? Tell us at views@livemint.com

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