Graphic by Santosh Sharma?Mint
Graphic by Santosh Sharma?Mint

Disconnect between real economy and financial markets global phenomenon

  • It is not just Indian investors, globally too stocks are rising irrespective of a lack of improvement in global growth
  • The MSCI India Index is trading at a one-year forward price-to-earnings multiple of 19 times, or about a 45% premium to its Asian peers

Indian stock market indices have scaled new highs on hopes of a further stimulus by the government. But India isn’t the only market where equity indices are charting a course of their own, regardless of the state of the economy.

Asian and US stocks have also clocked handsome gains in recent trading sessions, with expectations of US-China trade talks driving the up-move. China’s commerce ministry said the two countries had reached a consensus on resolving relevant issues.

Going by the past track record of these meetings, it makes sense to be sceptical of anything concrete coming out. Even if some resolution was reached, global demand slowdown is unlikely to reverse in a hurry. In that case, while there may not be further deterioration, a full-fledged recovery remains a tall task.

But investors appear to be sanguine the world over. Robert Carnell, chief economist and head of research (Asia-Pacific) at ING, in his latest note on new highs in stock markets says, “Animal spirits seem strong and optimistic, just don’t look at the data too closely." So, it is not just Indian equity investors but globally as well, stock markets are rising irrespective of lack of improvement in global growth. “I can’t help feeling that something isn’t quite right," adds Carnell about the congruence of market enthusiasm and not-so-bright macro data.

JPMorgan’s Global Composite Purchasing Managers’ Index paints a grim picture of economic activity worldwide. In October, the reading stood at 50.8—barely above the threshold, which separates expansion from contraction. But global markets were unmoved.

In a recent article titled, Why Financial Markets’ New Exuberance is Irrational, economist Nouriel Roubini points out a similar concern. He says owing to a recent easing of both Sino-American tensions and monetary policies, many investors seem to be betting on another era of expansion for the global economy.

“The disconnect between financial markets and the real economy is becoming more pronounced. Investors are happily focusing on the attenuation of some short-term tail risks, and on central banks’ return to monetary-policy easing. But the fundamental risks to the global economy remain. In fact, from a medium-term perspective, they are actually getting worse," adds Roubini.

In India, tax revenue collections have been unsatisfactory. This raises concerns over whether the government can dole out more tax sops without compromising on its fiscal position. Following the latest high-frequency data, economists have warned of a higher fiscal deficit than earlier expected for the current fiscal year. But Dalal Street remains sentiment-driven and myopic.

The MSCI India Index is trading at a one-year forward price-to-earnings multiple of 19 times, or about a 45% premium to its Asian peers.

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