Liquidity is driving up stock markets globally

The uncanny ability of the stock market to take everyone by surprise was once again proved by the recent sharp and swift rally in the market. 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 Federal Open Market Committee (FOMC) meet of 30^th January completely changed the scenario for global capital flows. After January 30^th 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 quantitative easing (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.

This bull-run is global

The ‘risk on’ triggered by the liquidity flows has lifted global stock markets into bull orbit. As on 13^th 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 have only a secondary role.

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. Foreign Portfolio Investments (FPIs) who have been on selling spree in 2018 have turned aggressive buyers investing more than Rs 28000 crores since 1^st February. 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. Even though this may be the likely outcome, it appears to be a bit premature. Global economic slowdown is another area of concern.

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. In my previous two articles I have made a case to “profit from volatility” (January 2019) and to “go for calibrated accumulation” (February 2019). Now that the markets have run up quite a bit, it would make sense to take a breather but to continue with systematic investments. Partial profit booking also may not be a bad idea.