The great bull run of covid: investors must remain vigilant


There has been a lot of stuff in the air in India lately that is considered music to investors’ ears, serving up crisp and quick notes to our BSE Sensex to surpass 60,000 last week. Our daily number of covid cases has remained low, with no signs of a third wave so far. The Center finally separated two political nodes in a manner worthy of applause. He solved the retroactive tax problem, belatedly but about as well as he could, and also sought to finally unravel our telecommunications tangle. India’s economic pulse has picked up and the government has continued with plans to recycle its assets and clean up the loan portfolios of our lenders, even as exports are improving, budget spending is slowly taking effect and the central bank keeps our economy afloat. liquidity. Private investment remains at a standstill, but the gallop of unicorns heading for public offerings and gains made by a growing crowd of retail investors, since big buyers gained access to ultra-cheap money , around the world, have served as the drumbeat of a bull-running pandemic. The jarring sounds of the West and the East have had minimal impact so far, despite our index exposure to the rest of the world. As long as the music is playing, you have to get up and dance – that’s what then Citigroup chief Charles Prince said in 2007, on the eve of a crash that plunged global finance into the crisis, revealing hidden risks and poorly valued credit.

Tragedy or farce, history doesn’t need to repeat itself, but awareness of risk must intensify as stock prices rise. Equity values ​​show asset inflation caused by too much liquidity for too few options, a result of the use of super easy money by central banks for bailouts around the world. The need to calm covid foreclosures has led central bankers to weaken their vigilance on price stability, and given the volume of US dollar creation, even modest inflows are sure to inflate Indian stocks. For the most part, this explains the Sensex’s price-to-earnings (PE) ratio of over 30, a blink of an eye from its past record. Of course, large companies may be on the cusp of increasing profits through a business upturn, but the signs are not yet clear, and while young people can afford to be long, the horizon for returns is not yet clear. The entire market could not have been stretched by an entire decade to justify a PE ratio of over 30. At such dizzying heights, prices can easily get jittery. Under shock watch right now, there are two things. One is the likely bankruptcy of Evergrande, a Chinese mega-builder who appears unlikely to be bailed out, although China’s cushion for its ripple effects may not extend beyond its borders. . Another is a reversal in capital flows as the US Fed cancels its stimulus, for which it signaled a faster but firmer path last week. An orderly reversal would make a “tantrum” less likely, but global markets could still go into spasms if it exposes poorly valued assets and financial cracks. What if the Fed’s largesse turns out to be too generous for the good of the world?

Such a crisis is not a trivial risk. It could even manifest itself in a spike in general inflation that is proving difficult to suppress, as economist Nouriel Roubini has warned, forcing a reaction of rate hikes from the Fed that could cause stagflation. The Fed has reduced its inflation target from 2% to an average over an extended period, and the risk of a monetary incident appears less remote amid surging demand in the United States. What underlies all of this is the unseen uncertainty of what casino impulses – fueled by easy money – might have caused across the world. Overall, investors must remain vigilant.

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