During the first few weeks of May 2009, equity markets, in
the emerging economies, reached their highest levels, for the
first time since October 2008. Recently, on the first
working day of May, Sensex crossed 12,000 points for the first time in
2009, from the lowest closing level of 8,047 points on March 06, 2009.
Since then, barring minor downward fluctuations, it has continued
its upward journey, as FIIs and domestic institutional investors
have suddenly turned into net buyers. Owing to the global as
well domestic economic slowdown, Sensex started moving southward
in the year 2008 from the level of around 21,000 points in January
2008 to around 8,000 points by the end of the year. However, since
the second week of March 2009, it has been showing signals of
moving northward and has provided returns of around 50% within a span
of less than 2 months. (Refer to Graph 1) But, there are infinite
number of questions among analysts, policy makers and investors about
the sustainability of this upward journey, as this rally is a
sudden surprise, especially when there are no major visible signs of
economic recovery at domestic, as well as global levels. The most
common questions are: Is this rally sustainable? Is it driven by
the fundamental or irrational factors? Does it indicate that the
Indian economy has started reviving or is going to start reviving? Is
the stock market a leading indicator of the reviving economic
activity? To answer these, we need to understand the insights of
different fundamental and technical aspects at macro, as well as micro
levels.
The year 2008 started with optimism everywhere. There was
a debate that the economy may be overheated, as it had enjoyed
around 9% annual growth rate during 2004-07. Corporates were
busy declaring positive financial results and drafting their
expansion plans. Employment opportunities were in an uptrend. Stock
market had no limits to move upwards. Indian markets started the
year with positive waves, with the Sensex hovering around 21,000
points in January 2008. In no time, the sentiments turned negative, due
to the impact of the global financial crisis. The global financial
crisis took the shape of a global economic slowdown. Even though the
policy makers and political leaders boasted that the Indian economy
would be insulated from the global slowdown, Indian economy could not
be shielded from falling prey to the financial tsunami. Although it
was argued that the Indian economy had experienced sustained
growth rates in the last few years and that the strong domestic demand
and high savings and investment rates would insulate the Indian economy from the global
slowdown, things turned contrary to what was expected. The contagion effects of the global economy
started spreading to the Indian economy through trade, as well as financial channels. During the
last quarter of 2008, the situation further worsened, as inventory pile ups and job losses reached
historic highs across all segments of the economy.
As per the estimates of IMF, the outlook for the global economy continues to remain grim, with a
fall in world economic growth to 0.5% in 2009, the lowest rate since World War II. The average
economic growth rate in advanced countries is estimated to come down by 2% in 2009, while in
emerging economies, it is expected to slowdown sharply, from over 6% in 2008 to around 3% in 2009.
However, recovery is expected in 2010 due to the expected functioning of the expansionary fiscal and
monetary policies being adopted now. |
