In the past five years, in the wake of the sub-prime crisis, we have seen many attempts at various stages by various governments to try and stimulate growth. The Americans started with a bailout of financial institutions and big businesses. After that, the US recipe has been to flood the economy with very cheap liquidity.
Japan has tried doing something similar in the past year or so. Europe has also kept rates low while Germany has offered bailouts to the financially distressed members of the Euro zone. China and India have both attempted stimulus programmes by pumping investments into infrastructure.
None of this has really worked in the sense that there hasn't been a strong economic recovery and many major economies have remained on the cusp of recession. Unemployment has remained high across Europe, Japan and the US. In India, regulatory issues and tardy clearances just meant that a lot of money got blocked in stalled projects. China ended up with massive spare capacity and a problem when exports slowed.
Once policies like this are set in motion, it's very difficult to change course. Central banks will have to cut down money supply at some stage but they dare not do it too early, or too abruptly.
One of the problems here is that equity asset valuations have gone through the roof. This is not surprising. Easy money means returns from interest-rate instruments is minimal. Commodities have been weak because commodity prices are linked to demand in the real economy. Nobody wants to invest in the real economy either because there is spare capacity across many sectors. So, money ends up being parked largely in secondary equity.
The easy money from the US and Japan has ended up pushing equity markets across the world to highs. The disconnect between slow growth and high stock prices has now continued for so long, investors have started to believe that this is a normal situation.
It isn't. In a best case scenario, growth will pick up even as money supply is tapered and valuations will be sustained. More likely, there will be some sort of sharp correction at some stage. But as long as the easy money is flowing, the party could continue.
This makes things very difficult for an investor who does look for value and a safety margin. There are very few, if any companies available, which offer high value in the current market. There are companies with good balance sheets and good growth potential. But they are all priced at uncomfortably high valuations.
Given political instability and a probable policy stasis until the next general elections, we cannot really expect growth to pick up much in the next six months. Indian interest rates are likely to stay high since inflation shows no signs of reduction.
Sometime during that period, the US will also start tapering its quantitative expansion. If India ends up with a hung Parliament, or the "wrong" coalition in charge, investors could pull out in droves. So it is reasonable to expect a correction, perhaps a very deep correction, under these circumstances.
However, the market is likely to trend up on the hopes of a stable political situation and more dynamic policy-making before any such correction gets underway. It would be foolhardy to predict how high it could go since it has just recently hit record highs.
If this is the latter stage of a bull run, we could see a big upmove in the next few months before there's a full-scale correction. During such a phase, the market is likely to "narrow" in that investors will tend to focus on a small list of select "hot " stocks. Volatility is also likely to rise - interim corrections will be sharper. Handling this sort of situation is difficult. A systematic investor should consider reducing the quantum of fresh stock market exposure. A value investor needs to maintain rigid discipline because it is easy to be tempted by quick returns.
As and when the market does break down, it will probably happen on the basis of well-publicised news. Either political events will trigger a trend reversal, or there will be a shift in stance from the US Federal Reserve. So the signals would be loud. When the trend-reversal becomes obvious, investors will have to take a call on booking profits or holding on and averaging down.
Japan has tried doing something similar in the past year or so. Europe has also kept rates low while Germany has offered bailouts to the financially distressed members of the Euro zone. China and India have both attempted stimulus programmes by pumping investments into infrastructure.
None of this has really worked in the sense that there hasn't been a strong economic recovery and many major economies have remained on the cusp of recession. Unemployment has remained high across Europe, Japan and the US. In India, regulatory issues and tardy clearances just meant that a lot of money got blocked in stalled projects. China ended up with massive spare capacity and a problem when exports slowed.
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Meanwhile, government deficits and central bank balance sheets have started bloating. The global economy does seem to be recovering but it is a very slow process.
Once policies like this are set in motion, it's very difficult to change course. Central banks will have to cut down money supply at some stage but they dare not do it too early, or too abruptly.
One of the problems here is that equity asset valuations have gone through the roof. This is not surprising. Easy money means returns from interest-rate instruments is minimal. Commodities have been weak because commodity prices are linked to demand in the real economy. Nobody wants to invest in the real economy either because there is spare capacity across many sectors. So, money ends up being parked largely in secondary equity.
The easy money from the US and Japan has ended up pushing equity markets across the world to highs. The disconnect between slow growth and high stock prices has now continued for so long, investors have started to believe that this is a normal situation.
It isn't. In a best case scenario, growth will pick up even as money supply is tapered and valuations will be sustained. More likely, there will be some sort of sharp correction at some stage. But as long as the easy money is flowing, the party could continue.
This makes things very difficult for an investor who does look for value and a safety margin. There are very few, if any companies available, which offer high value in the current market. There are companies with good balance sheets and good growth potential. But they are all priced at uncomfortably high valuations.
Given political instability and a probable policy stasis until the next general elections, we cannot really expect growth to pick up much in the next six months. Indian interest rates are likely to stay high since inflation shows no signs of reduction.
Sometime during that period, the US will also start tapering its quantitative expansion. If India ends up with a hung Parliament, or the "wrong" coalition in charge, investors could pull out in droves. So it is reasonable to expect a correction, perhaps a very deep correction, under these circumstances.
However, the market is likely to trend up on the hopes of a stable political situation and more dynamic policy-making before any such correction gets underway. It would be foolhardy to predict how high it could go since it has just recently hit record highs.
If this is the latter stage of a bull run, we could see a big upmove in the next few months before there's a full-scale correction. During such a phase, the market is likely to "narrow" in that investors will tend to focus on a small list of select "hot " stocks. Volatility is also likely to rise - interim corrections will be sharper. Handling this sort of situation is difficult. A systematic investor should consider reducing the quantum of fresh stock market exposure. A value investor needs to maintain rigid discipline because it is easy to be tempted by quick returns.
As and when the market does break down, it will probably happen on the basis of well-publicised news. Either political events will trigger a trend reversal, or there will be a shift in stance from the US Federal Reserve. So the signals would be loud. When the trend-reversal becomes obvious, investors will have to take a call on booking profits or holding on and averaging down.