Weak markets

Stock markets across the world have been weak in March, with the MSCI World Index falling 3.7 per cent in the month to March 22. Likewise, the MSCI emerging markets index is down 2.7 per cent.

The weakness in the Indian stock market therefore mirrors the downtrend in global markets. There has been much comment on the lack of liquidity in the domestic market as a result of the large number of primary issues, and there's no doubt that a large amount of investors' funds has been diverted to the primary markets. It's important, however, to realise that companies across the world are going in for Initial Public Offerings (IPOs).

The IPO market in South-east Asia and China has been red hot for many months, while companies in Europe are raising $ 8.7 billion this month, more than the entire amount raised last year. Clearly, the spate of IPOs is having a dampening effect on secondary markets the world over.

The big question, of course, is whether the pullback in equity markets spells the end of the long boom, or whether it is just another bull market correction. The recent sell-off has been attributed to the Madrid bomb blasts, the assassination of Sheikh Yassin, the lack of jobs in the US recovery, high oil prices, and to fears of a slowdown in the Chinese economy. But oil prices have been high for quite some time and job growth has been absent in the US for years, while terror alerts and attacks have been a regular feature for months. These reasons are being cited now merely as excuses for taking some money off the table.

After a smart run-up, the markets need to pause and book some profits. On the other hand, there are several questions nagging global investors. If the US economy is indeed doing as well as market valuations suggest, why is the Federal Reserve not raising interest rates?

To be sure, Chinese demand for raw materials is insatiable, but isn't it true that the China play has already sent commodity prices sky-high? These concerns have led to investors pulling out money from US equity funds in three weeks out of the last four. Dedicated emerging market funds have seen two consecutive weeks of outflows, the first time this has happened since last May. There are also indications that investors are rotating their money into assets that have not appreciated quite so much.

For instance, funds dedicated to emerging Europe, primarily the Russian, Polish and Hungarian markets, continue to see substantial inflows, as do Japan equity funds. It is no coincidence that the only Asian markets in negative territory this year are the Indian and Thai markets, which saw huge increases last year.

If this new trend continues, it will be bad news for the Indian market, where last year's rally was entirely fuelled by foreign institutional investors. Good corporate quarterly results and a victory for the ruling NDA have already been discounted. Higher commodity prices are hurting some companies. To be sure, liquidity all over the world continues to be more than adequate, but that liquidity will be of little help if confidence starts dropping.