Stock markets are supposed to reflect market sentiment. Typically, a buoyant stock market means there are strong proclivities towards growth. But the 2012 picture is quite different going by what has happened around the globe. Global conditions have been weak with uncertain future signals - fiscal cliff, the possible collapse of the Euro zone, stagnation in India and a downturn in China. Experts are only talking of the varying degrees of a slowdown with the 'R' word floating around.
Yet, the stock indices have shown a different trend. In dollar terms, according to The Economist, Indian indices have been up by 24.5% (YoY) from last year, which was probably the most impressive among the larger markets. Turkey, Thailand, Pakistan, Mexico and Egypt scored better while even countries like the US (9.8%) Euro zone (19.8%), Japan (8.5%) and the UK (13.3%) did well.
But stock indices are clearly not reflective of the state of the economies. Why should this be so? Is it a case of irrational exuberance (which would mean that the fall, when it comes, will be sharp) or is there some economic rationale for stocks doing well across markets?
To begin with, other asset classes were under-performers. Looking at commodities, food went up by 1.5%, while metals did slightly better at 3.5%. On the other hand, non-food product prices declined by 6.8% during this period. Gold was better by just 3.6% which is different from what was seen in India, where the domestic price took in the impact of the rupee depreciation as well as higher tariffs to further go up.
Oil was down by 10.9% and, hence, the slowdown in the global economy did not mean a crash-landing of prices which was the case during the financial crisis when prices moved towards the $40/barrel mark. Therefore, commodities were not the flavour of the season.
Global currencies were largely stable during the year which made currency a less attractive investment. The dollar was volatile vis-a-vis the euro given the variety of problems seen in both the US and the Euro zone.
By the end of the year, most currencies strengthened against the dollar - India was an exception as was Indonesia. But, more importantly, with volatility being considerable, carry trade was not preferred as the exchange risk was high. This became popular during the last crisis when rates were reduced by central banks all over.
Fixed income markets were flat. Interest rates remained low thanks to the approach taken by the US Fed, ECB and BoE. Easing of money through different programmes meant there was a lot of money to beTherefore, in this situation, where liquidity was in abundance, money flowed into equities. And this was across all markets. The choice was between holding on to cash or taking a risk in carry trade or buying stocks with fair valuation.
Therefore, it was a rational choice considering that markets ended low in 2011 and valuations were cheap for potential investors. Such flows have spurred markets and sent out contrary growth signals - generally stock markets reflect the strength of the economy, but this link has been severed today.
Typically, when economies are down, stock prices move in the same direction and become cheap for potential investors. As long as they believe that conditions can only improve in future, they would continue to buy, which is what they are doing today.
Quite evidently funds have preferred these markets which are likely to continue to witness such inflows as long as growth is stagnant in the developed world and liberal monetary policies are pursued.
A reversal can be expected only when these underlying conditions change. At that point of time there would be rebalancing of portfolios. Given the way things are moving, 2013 is likely to see a minimum turnaround. Therefore, happy days could be there for some more time. used. Lending was down as there was little trust between banks and borrowers. Nor was there much trust between banks and sovereigns.
Yields on government bonds were at a new low, with policy rates almost touching zero in the US. Real yields on 10-year G-secs were in the negative zone for almost all countries. A positive zone only meant the yield was less than 1%. The exceptions were countries like Brazil and Mexico. So, clearly, government paper was not attractive. The fact that the Euro crisis worsened meant that even the assurance of the safety of instruments was questioned.
Yet, the stock indices have shown a different trend. In dollar terms, according to The Economist, Indian indices have been up by 24.5% (YoY) from last year, which was probably the most impressive among the larger markets. Turkey, Thailand, Pakistan, Mexico and Egypt scored better while even countries like the US (9.8%) Euro zone (19.8%), Japan (8.5%) and the UK (13.3%) did well.
But stock indices are clearly not reflective of the state of the economies. Why should this be so? Is it a case of irrational exuberance (which would mean that the fall, when it comes, will be sharp) or is there some economic rationale for stocks doing well across markets?
To begin with, other asset classes were under-performers. Looking at commodities, food went up by 1.5%, while metals did slightly better at 3.5%. On the other hand, non-food product prices declined by 6.8% during this period. Gold was better by just 3.6% which is different from what was seen in India, where the domestic price took in the impact of the rupee depreciation as well as higher tariffs to further go up.
Oil was down by 10.9% and, hence, the slowdown in the global economy did not mean a crash-landing of prices which was the case during the financial crisis when prices moved towards the $40/barrel mark. Therefore, commodities were not the flavour of the season.
Global currencies were largely stable during the year which made currency a less attractive investment. The dollar was volatile vis-a-vis the euro given the variety of problems seen in both the US and the Euro zone.
By the end of the year, most currencies strengthened against the dollar - India was an exception as was Indonesia. But, more importantly, with volatility being considerable, carry trade was not preferred as the exchange risk was high. This became popular during the last crisis when rates were reduced by central banks all over.
Fixed income markets were flat. Interest rates remained low thanks to the approach taken by the US Fed, ECB and BoE. Easing of money through different programmes meant there was a lot of money to beTherefore, in this situation, where liquidity was in abundance, money flowed into equities. And this was across all markets. The choice was between holding on to cash or taking a risk in carry trade or buying stocks with fair valuation.
Therefore, it was a rational choice considering that markets ended low in 2011 and valuations were cheap for potential investors. Such flows have spurred markets and sent out contrary growth signals - generally stock markets reflect the strength of the economy, but this link has been severed today.
Typically, when economies are down, stock prices move in the same direction and become cheap for potential investors. As long as they believe that conditions can only improve in future, they would continue to buy, which is what they are doing today.
Quite evidently funds have preferred these markets which are likely to continue to witness such inflows as long as growth is stagnant in the developed world and liberal monetary policies are pursued.
A reversal can be expected only when these underlying conditions change. At that point of time there would be rebalancing of portfolios. Given the way things are moving, 2013 is likely to see a minimum turnaround. Therefore, happy days could be there for some more time. used. Lending was down as there was little trust between banks and borrowers. Nor was there much trust between banks and sovereigns.
Yields on government bonds were at a new low, with policy rates almost touching zero in the US. Real yields on 10-year G-secs were in the negative zone for almost all countries. A positive zone only meant the yield was less than 1%. The exceptions were countries like Brazil and Mexico. So, clearly, government paper was not attractive. The fact that the Euro crisis worsened meant that even the assurance of the safety of instruments was questioned.
No comments:
Post a Comment