The stunning upward trajectory of benchmark indices has left people gasping for breath. With an eighty percent rise over a span of two odd months, many experts have proclaimed - “The worst is over”. While some euphoric observers have described it as the commencement of the next Bull Run, others have adopted a more cautious approach, dubbing the present rally as a cyclical bull run in a structural bear market. With better than expected Q4 GDP numbers, is it possible the decoupling theory is making a comeback? Can emerging markets embark on a bull run while the west limps on?

Changing scenarios

At the peak of the crisis, fear prompted a retreat from ‘risky’ to ‘safe’ assets namely the US dollar and treasuries. These were considered ‘safe’ havens as assets classes across all economies were plunging. However, the US policy response to the crisis in the form of monetary and quantitative easing and stimulus packages, has led many to question the long term viability of staying invested these ‘safe’ assets.

With the US still in a very precarious situation, the probability of the Fed raising rates anytime soon is very low. Also, the fragile state of the economy further casts aspersions on the ability of the largest borrower in the world to pay back its creditors; a point which has been highlighted by the head of the Chinese central bank (the largest buyer of US treasuries).

Fear leading to paranoia which prompted a move away from ‘risky’ emerging markets was misplaced, with various statistics pointing out the same. Emerging economies are faring much better than the pessimistic forecasts, and their reliance on the US consumer is gradually decreasing. This realization has prompted a global re-routing of portfolios in their favour. Inflows into emerging economies, especially BRIC economies, have suddenly increased sharply, leading to ‘suspicious’ stock market rallies.

FII net purchases (India), which were negative for 2008, stood at 7000 crores in April; climbing to an astonishing 20,000 crores in May. While some may argue that election results may have impacted the inflows, they were evenly distributed in May. Ironically, such an interest was shown only in September-October 2007, before the last lap of the Bull Run.

A huge quantum of investable funds was lying on the sidelines because of uncertainty about the direction of the market. Having missed the rally and underperforming the markets, there is a tendency to buy on pullbacks, which is taking the market higher.

Great Expectations

The uncertainty in the political arena had complicated matters further. It was widely believed that the formation of government at the centre would be possible only with the help of ‘difficult and demanding’ regional parties. Given the inability of the Congress to undertake reforms during the last five years, due to coalition compulsions, the unexpected result was given two thumps up by the market. It is widely believed and expressed that the current government with a strong mandate will fast track reforms. With more stress expected on infrastructure, exports and measures to revive the economy, GDP growth forecasts have been revised upwards.

A secular Bull Run?

Liquidity created post the collpase of the dotcom buble was largely responsible for the massive flows directed towards emerging economies till 2007. Now again, a low interest rate regime in most countries around the world coupled with quantitative easing being carried out on a massive scale, is largely going to benefit emerging economies, in particular BRIC nations.

The author is a financial analyst