In your interest.
Online Personal Finance Magazine
No beating about the bush.
With the Sensex having run past 15,500 to give us almost a 100% return over the past three months, bullishness is well set among large investors, especially institutional investors. They just have to buy India at any cost, even when the Sensex P/E is 17, which is in an overvalued zone given the historical trends; Indian GDP growth is just about 5% and the global economy will contract 3% this year, according to the World Bank.
But an overvalued market can keep rising on hopes of higher growth and the brute power of money. Indeed, in the mania of 1994, when portfolio investment by foreigners in the Indian capital market started, the Sensex P/E had touched 25. Second-guessing a herd of stampeding bulls is a sure way to get trampled over. In such a situation, the best course is to track stock prices or the index over a range and see whether the range breaks. As of now, 15,000 is the short-term line on the sands for the Sensex. A crack below that could mean a 1,000-1,500-point decline.
Global economic trends, which will determine the attitude towards risky assets, continue to be highly confusing. Take US interest rates and inflation. An array of top minds is convinced that the incredible increase in money circulation has to end up in higher inflation and interest rates. Legendary investors like Warren Buffett, Julian Robertson, Jim Rogers and Bill Gross all agree on this outcome, which is terrible for stocks. On 11th June, the yield on the 10-year Treasury Note, the benchmark rate for US mortgages, briefly traded above 4%. Why is this very significant? Because the US Federal Reserve Board had kept interest rates at almost zero. The market obviously has other ideas.
Looking at the long term, one of the most ominous scenarios has been portrayed by economist Arther Laffer (of the Laffer Curve fame). In a recent article in The Wall Street Journal, he predicts; “Higher interest rates, massive tax increases, and partial default on government promises. But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences.” Laffer concludes: “To date, what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed.”