Wednesday, February 8, 2012

Market knows the best

Indian Rupee and stock markets have risen close to 8% and 15% respectively since the start of 2012.  Rupee's rise is largely attributable to (1) RBI's measures to bring in stability to rupee and (2) foreign portfolio flows.  Foreign Institutions bought into Indian equities to the tune of $ 3.2 billion (net) in 2012; compare this with 2011's net outflow of $357 mio.  This explains the sharp recovery in Indian stock markets.  Why is investment pouring in?  valuation?  expectation of low interest rate regime?  factoring in investment / business friendly budget? 

My anxiety stems from the fact that nothing has changed significantly in the last month to justify this euphoric move.  We are still dealing with the overhang of Euro debt crisis and it's impact on emerging markets, internal policy logjam and Government's inaction, fiscal deficit, inflation (current levels seem unsustainable as seasonality factor looms large), CSO's (Central Statistics Office) latest growth projection of 6.9% for FY 2012 (India GDP was a much impressive 8.4% in 2010-11) and the list could go on. I don't want to sound like a naysayer; but this recovery has been so quick, I have trouble comprehending!

If we scratch the surface a bit more, we see recovery in industrial output, expanding manufacturing and service sectors, impending low interest rate regime and its positive impact on businesses and rupee's smart recovery - is a a turnaround  round the corner? Has the market got its instinct and timing right? 

Having spent close to couple of decades in (and trying to understand) markets, the one thing that I have learnt is, "market knows the best".  Financial markets are (said to be) efficient and prices in all information. Research shows that, when it comes to comprehending big picture of the economy,  market is more spot-on as it aggregates the information of millions of investors.  While we are fretting over statistics, is market (read group of investors) seeing a different and much better picture emerging? 

Is India about to shine again? Is the stock market and rupee rally likely to continue?  The answer is, I don't know.  The reality is, that  the assets are where they are today - rupee stronger, asian stock markets higher, gold well above 1700, euro (presently at 1.3275) defying fundamentals and Dow looking promising (a tad below 13k). 

So what do we do? Some thoughts till we market talk again next week:

(1) Market is reality, view is merely speculation
(2) If you want to gamble, Vegas may be a nice choice
(3) No one went broke booking profits 

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