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Why is the market buoyant?

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BS is euphoric about the market this week:

Sensex registered its sharpest 8-day rally in the last one year to gain 2.5% on Friday and the rupee appreciated sharply, shrugging off higher-than-expected August inflation, after the government’s bold move to increase diesel prices and the US Fed’s announcement of a third round of quantitative easing sparked off a rally in global stocks.

Today, the BSE Sensex has surged 443 points to closed at 18,464, rallied 1,151 points in the past eight trading days between September 6 and September 14, reporting its highest rise since June 2011. The National Stock Exchange (NSE) S&P CNX Nifty closed at 5,578 has surged 352 points during the period.

But one expert was dyspeptic enough to take issue with the market in Firstpost:

It is difficult to see the logic for a stock market rally (beyond the liquidity argument) right now at least till 2015.

Others had ready explanations, for example NVO News reported:

Indian stock markets got a much needed boost from US stimulus package and diesel price hike in India.

Among other Asian markets, Japan’s Nikkei closed up 1.83 percent while Hong Kong’s Hang Seng closed 2.90 percent higher. Shanghai’s composite index closed up 0.64 percent.

The European markets were trading in green too. France’s CAC was up 1.90 percent, while Germany’s DAX was up 1.34 percent. Britain’s FTSE 100 was trading 1.38 percent higher.

Since foreign markets are hardly likely to respond to India’s diesel price hike, and even less likely to respond to a tepid stimulus which the US markets have ignored, this last explanation is completely bogus. Instead one must ask whether the Indian market is as buoyant as it should be?

Now how much the gains come to in actual currency depends on the market capitalization. We know that at the end of 2011 the market capitalization of Nikkei was USD 3,325 billion, of Shanghai USD 2,357 billion, of Hong Kong USD 2,258 billion and of BSE USD 1,007 billion. Since this data is six months old, the market cap will have changed by now, but it is not likley that BSE would be far from 1/3 of Nikkei or less than half of Shanghai or Hong Kong. So the 2.50% gain in the BSE increases the net value by less than half that in Nikkei. So the real question is why is the market insufficiently buoyant?

The general sense of buoyancy is due to Germany’s assertion that it will stand by the Euro, and the fact that courts have vindicated this stand. This week’s elections in the Netherlands also affirmed a very strong commitment to the Euro. So what is weighing India down remains the usual political and economic problems: insufficient clarity on policy and stagflation (ie, unchecked inflation even as industrial production does not grow).

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Written by Arhopala Bazaloides

September 14, 2012 at 12:54 pm

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