The recent sharp and swift rally in the market took most market participants by surprise. By end January this year, Emerging Markets were languishing on fears of continuation of rate hikes by the Fed. The consensus was that the Fed would raise rates three times in 2019 on top of the four hikes of 2018. The FOMC meet of 30th January completely changed the scenario for global capital flows. After January 30th FOMC Meet, the Fed chief declared that the “rate hikes are on hold”. Later the European Central Bank (ECB) also announced a dovish monetary stance and Japan is continuing with its QE program. The dovish stance of the three leading central banks of the world along with the monetary stimulus being implemented by the People’s Bank of China have unleashed a gush of liquidity chasing risky assets like EM equity. Dollar carry trade is playing a major role in this liquidity driven rally in EMs.
The ‘risk on’ triggered by the liquidity flows has lifted global stock markets into bull orbit. As on 13th March 2019, the MSCI All Country Index is up by 10.9 percent and MSCI EM Index is up by 8.8 percent. The DMs have done better with the MSCI US Index up by 12.5 percent and MSCI EMU Index up by 9.8 percent. It is interesting to note that while MSCI EM Index is up by 8.8 percent, MSCI India Index is up by 4.6 percent only. This means we have some more catching up to do. Make no mistakes about this: this is a global rally powered by liquidity; fundamentals don’t have any role. In fact, there is a disconnect between the slowing global economy (Indian economy too) and bullish markets.
During the last one-month the Nifty is up by 5.6 percent and the Nifty Midcap and Nifty Small-cap indexes are up by 8.4 percent and 13.4 percent respectively. FPIs who have been on selling spree in 2018 have turned aggressive buyers investing more than Rs 37000 crores since 1st January till 19th March, with Rs 23000 crores coming in the first 19 days of March alone. HNIs and retail investors also have joined the party.
It is also being argued that the markets are discounting a market-friendly election outcome. Some market players are betting on the return of the NDA to power. This might be the likely outcome, but it appears a bit premature. It is important to note that the market got many major recent outcomes wrong: Brexit, election of Mr Trump and recent Malaysian elections. Global economic slowdown is an area of concern. The slowdown in Indian economy, the sharp deceleration in the automobile sector and dip in IIP are disquieting.
Sustained FPI flows can take the market higher; but at higher levels valuations would get stretched. We have been consistently advising investors to buy quality stocks/ scale up SIPs before the elections. Now that the markets have run up quite a bit, it would make sense to take a breather while continuing with systematic investments.