2007 Vs 2010 – Chasing The Bull

Sensex again set to be hitting all time high of 21000, uproar in the market with a phenomenal 15% upside in the September month alone. Across the world all the markets have seen 10+% high for the same month, as a matter of fact rest of Asia saw an upside of 25%, all in all goods news so far.

But this also comes with a looming threat of history repeating it self as last time. So the big question that lies ahead is: will it be the same fate where the world market would crash unprecedentedly and another down side awaits. It's million dollar question to be answered. Lets try to demystify.....

India was one of the lone economy which was spared in the last recession, the reason for the same was the domestic growth story. In last decade India has shown tremendous growth in it's domestic market, be it production, mergers and acquisitions or infrastructure. The India growth story has been bought positively by the foreign investors (FDI & FII both). The trend of data coming into the India market by foreign investors have also proven it, along with that the relaxation in the policies by the finance minister to allow foreign investors to directly invest in the Indian market would be Cherry on the cake. In all there are more positives to take in account than the negatives to rule out that we are going to see any down side in the Indian market any sooner.

Having said that one really can' rule out the global factors, we shouldn't forget that our market also joined the bear rally in the last down side when we hit 7900 mark. Therefore incase of any dramatic sequence of event could also result in another bear rally in our market. So the big question then is: does there any such drama in the making. And trust me there is one looming threat called as Emerging Market (EM) bubble.

As I mentioned earlier that India was one of the lone survivor to the last recession, the rest of the economies which also survived the litmus test were all emerging markets. As the big economies collapse like pack of cards in front of the sub-prime mortgage crisis, these well regulated EM were safe heavens for the investors to park their money. Recession made the regulators and the government to pour in money to their country's economy which resulted in liquidity and also relaxed the environment to get back in track on the growth (Instead on getting neck deep in the recession). With their generous TARP (Trouble Asset Relief Programme), US economy came back in terms with normalcy. The same story goes well with the various relief packages by European governance bodies to pour in money in system for then toxic European markets. But one mustn't forget the fact the liquidity in the current system in due to the very same reason as mentioned above. Once the government start tightening the screws to pull out it's money the crunch in liquidity is inevitable. In such circumstances for the sake of liquidity in their own country foreign investors would be left with only one option which is pulling out their money from their parking bay. Once these investors starts pulling their money out of the EM, the panic button would trigger a systematic chaos which would result in crash in EM. This would mean that not only the outside money would stop coming but also at these valuations the EM would be so high valued that everyone would have one option left which would be under weighting the markets which would show a sharp down in valuation and thus would lose it's value. For an example: With a script with a buy call today at valuation of 100 Rs with an FII & FDI contribution of 20% would straight drop to 60 Rs or even less when markets are under weight. What this means that we are likely to see a 30-40% downsize in the market should the emerging market bubble burst.

Just to support what has been said above there is one more bubble in the making which is the gold bubble. Most of the investment banks are recommending their clients to have 10-15% of their portfolio comprising of gold. What it means that they are sensing a possible downsize in near future and are moving cautious with plans. Gold has been giving the maximum return in the period of recession and if the world economy revives (Which is unlikely) gold is definitely going to lose it's shine and shed lot of valuation which would mean that lot of hard earned money pumped in gold would lose it's valuation resulting in another 20-30% valuation of money.

The success story is also riding on the fact the results for QoQ (Quarter on Quarter) and YoY (Year on Year) has shown exponential growth and is the silver lining on the sky for being optimistic on the future growth. But should the next few quarters shows below expected results it potentially can trigger panic button and result in downsize.

In which ever way you see there are enough reasons to be cautious for coming year. Lets hope we don't see much of the growth losing it's shine and future should beacon more reasons to cherish and success stories.