THE HANGOVER

The stock markets indices in the past 12 months has doubled.The money invested in any of the blue chip companies have given a return of anywhere between 50 to 200 percent returns in the past 2 years.

So is it safe to say that the bullish phase is back??

To be honest, I have my doubts on this.In the last year it has to be noted that enormous amount of money was pumped into the system by the government through stimulus packages.The effects of the stimulus packages are very much visible through the growth in the I.I.P numbers,besides billions of dollars have been pumped into the global economy.It would be safe to assume some amount of this money must have found its way into emerging markets including India.It is this excess liquidity which has been driving the growth in the Indian economy.I would say that the growth in the economy is just a hangover of the excess liquidity pumped in the system.

The economy cannot be in this state for a long period of time.Let's say that the govt. discontinues the stimulus packages (seems probable due to the high fiscal deficit.),this would lead to a decrease in the govt. spending which has been one of the vital contributor to the growth in G.D.P.Therefore corporate earnings,capital inflows and exports will have to fill in for the vacuum created by the decrease in govt spendings.Let's now evaluate the possibility of this happening.

1)Capital inflows

Long back I remember Warren Buffet saying in an interview that inflation is going to be the next big threat to the global economy.Looking at the weekly W.P.I numbers his concerns seem genuine.So it is safe to assume that the surplus liquidity will move to safer destinations such as T-Bills,G-Secs.Therefore probability of this component accelerating the G.D.P is very less.

2)Exports

There has been a year-on year increase in oil prices.Therefore increase in oil price should more or less offset the increase in exports.It would be safe to assume that the increase in exports would not be significant enough to offset the decrease in govt spending.

3)Corporate earnings

I had great expectations from this quarters earnings.The I.T cos. managed to come up with stellar set of numbers.RIL too managed to come up with decent set of numbers.Results of L&T and ICICI were disappointing.With the rate hikes around the corner it would be unfair to expect much from the interest rate sensitives.It is clearly evident that the corporate earnings is a mixed bag and it would be foolish to expect the corporate earnings to fill in for the vacuum created by the decrease in govt. spending.

All I would say is that,enjoy this phase (the hangover phase),dont be surprised if there is a dip before we climb the ladder.I would be happy if my analysis turns out to be correct,but I would be happier if my analysis turns out to be wrong.....since it would increase my chances of getting a job after my studies...........CHEERS:-)