Just a bubble?

The first in a series that looks at the flip side of promising trends — or the silver lining when the skies are grey.

Rakesh Rai        Print Edition: September 2009

As chairman of the US Federal Reserve board, Alan Greenspan used the phrase “irrational exuberance” to describe the market boom of the 1990s. We’d like to remind you of the phrase now, when all indicators seem to point to an economic resurgence. Yes, we’ve shown how this might be the end of the bad times, but there is the other possible scenario—the creation of a bubble.

In a recent report, titled ‘Bubblenomics: The Super Bubble Reiterated’ on the Indian stock markets, UK-based equity research agency, Noble, says, “India’s economic fundamentals do not justify a strong bull run from this point on as the stock market is fully and fairly valued. We do not expect a dramatic improvement in corporate earnings and cash flows in 2009-10 in an economic environment that is still heavily government-supported.”

Similarly, in the DSP Merrill Lynch mid-year outlook, Jyotivardhan Jaipuria, MD and head of research (India), says, “Corrections are likely. After the Budget, we had one, but despite that we are up nearly 100% (from lows). Will we make another 100% in the next 6-12 months? I don’t think so.” Nilesh Jasani, head of research (India) at Credit Suisse, says the Sensex could dip 15-20% from its present level around the end of this year because of factors like monetary tightening, regional or global market corrections, reform disappointments, primary market issuance pressure and fiscal deficit worries.

This is not intended to discourage you from entering the markets. We just want you to understand that there’s another side to most market reports. Here are some reasons to counter the reports of a bull run:

Causes for Concern

  • MONSOON: The delay in rains has led to a shortfall, which has obvious implications for agricultural growth and the economy.
  • REFORMS: There are rising concerns that the social agenda might take over the economic agenda, hurting confidence and growth. Also, questions are being asked about the government’s lack of majority in the Rajya Sabha, which could hamper law-making.
  • CRUDE OIL PRICES: According to Morgan Stanley estimates, a $5/bbl increase in oil prices above $72/bbl increases the oil subsidy in India by $3 billion, or 0.25% of GDP, if domestic fuel prices are unchanged.
  • COMMODITY PRICES: In the first quarter (April-June), the earnings of many Indian firms exceeded expectations mainly due to higher profit margins, much of which was driven by savings on raw material prices and higher realisations. Rising commodity prices could, therefore, lead to a potential earnings squeeze.
  • FII INFLOW: Only four sectors—real estate, banking & finance, engineering and oil & gas—accounted for over 71% of the total FII investment during the quarter. This lack of diversification could bode ill if there is a setback in one or more of these sectors.

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