By Amit Mudgill ET
NEW DELHI: US stocks are hitting record highs almost every day. Asian equity markets are at their highest levels in a decade. Domestic equity benchmarks are rising relentlessly, hitting new lifetime peaks every second day.
All that is good! The problem is, there is no suitable explanation for this rally. Even the most optimistic view of FY19 earnings cannot justify this rise.
So much so that the joke doing the rounds these days is that the equity rally is being driven by Rajinikanth, the iconic all-powerful demigod of Tamil film industry.
Economists and market veterans say the so-called Rajinikanth is no one else but global central banks. Some analysts call it an aberration caused by a glut of easy liquidity.
As many as 48 per cent of fund managers surveyed by BofA-ML globally this July said global monetary policy has been too simulative. The tribe subscribing to this view has grown over the past few months.
“Central bankers have behaved like Rajnikant,” says Nilesh Shah, MD, Kotak Mutual Fund. “They have done everything in last seven-eight years to provide a protection to the market on the downside. Hence fund managers and investors have started believing in this Put option from central bankers,” he said.
Total market capitalisation of global equities has surged to a record $77 trillion, over four times the US’s $18.5 trillion GDP. In last one year, global GDP added $12 trillion to to market-cap. (See chart)
“If the equity market corrects, if the economy comes down, they will pump in liquidity and cut interest rates. There is a complacency seeping in among investors about the global central bankers’ Put. This combination of lower interest rates and central banks rushing in to support the market and economy at every downfall is creating lower volatility,” Shah said.
Good or bad, central banks are now not too confident of taking that cushion away in a hurry. The Bank of Japan on Thursday said it would keep buying government bonds at an annual pace of 80 trillion yen ($714 billion). It also pushed back the timing for achieving its ambitious inflation target to FY19.
The ECB said the central bank would continue its monthly asset purchases at the current rate of 60 million euros a month until December 2017, or beyond, if necessary. Though Draghi’s commentary made some investors suspect that there could be some tightening next autumn.
The US Fed has laid out plans to wind down its $4.5 trillion dollar balance sheet. But recent dovish tone suggests even that will be gradual, very slow and steady.
“One of Fed policy makers recently said he wants to make the reduction in balance sheet as exciting as watching paint dry. That is so far what they have achieved. The markets have been very calm. We will see when they actually start the reduction of balance sheet and whether we have an impact. But they are going to start with such a small amount of selloff each month that it is unlikely to have any big impact,” Randall S Kroszner, Former Governor, US Federal Reserve, told ETNow recently.
DK Joshi of Crisil said there are just too many risks floating around in the advanced countries and they will force them to make their policy actions more gradual.
For India, Joshi expects one rate cut going ahead.
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