Yesterday once more? Market has a stock of worry | Economic Times

The stock market crash of 2008-09 and the subsequent recovery in 2009-10 might seem like events of the distant past, but their shadow continues to loom over investor behaviour a decade later. Therefore, celebrations around Sensex crossing the 50,000-mark are relatively muted as market participants fret that the furious run-up in stock prices since March 23 has happened too fast — and too soon.The evident mistrust isn’t restricted to whether the Sensex deserves to be where it is. The hectic pace of the turnaround since the crippling sell-off in February-March of 2020 and a narrow pool of growth assets favoured by overseas funds have contributed to the sense of scepticism.The upshot is that many rich investors caught by surprise have ended up staying out. Furthermore, there is cynicism whether the market deserves premium valuations at this point as the economy just about limps back to normalcy while corporate earnings recovery remains more uncertain than they perhaps were a decade ago.Market participants see some similarities between the two eras — 2008-2010 and 2020 — especially in the way the market rebounded unexpectedly.After a near-one-way tumble from January 2008 — when the Sensex first crossed 20,000 — to 8,000-levels in March 2009, there was an abrupt turnaround led by foreign fund purchases and the government’s fiscal measures, propelling the index above 21,000 in November 2010.Similarly, in January 2020, the Sensex crossed 42,000 for the first time ever before slumping to around 25,000 late March. Since then, it has been on a one-way ascent, although there has been some hesitation before the 50,000-mark.Crest and TroughFor those who like to juxtapose different phases of the market, the question has been whether the indices would enter a long-winded downward drift — similar to the three years after December 2010.While there are similarities in the shape of the fall and the recovery between the two phases, the parallels mostly end there.One difference between the two phases is the duration of the moves; the decline and bounce in 2008-2010 were more protracted and long-winded.Moreover, the market cycle now is at a different stage compared to what it was then. The outperformance of emerging markets (EMs) over developed markets (DMs) had ended with the start of the global financial crisis in 2008. In contrast, many global investors now think the next few years belong to EMs like India.The biggest reason for this outlook is the bleak outlook for the dollar — weighed down by the near-zero interest rates in the US and gigantic stimuli by the American central bank and the government. Although the dollar index has shown signs of some resilience of late after the 12.5 per cent slide from March, the consensus trade for the long run is still ‘short dollar’, making EMs vulnerable to sharp bounces in the US currency.The question market participants are asking is what happens when these flows dry up, especially when local institutions have been selling fuelled by investor redemptions.A key risk to the stock market is the rising bond yield in the US on expectations that the Biden administration could further enhance the stimulus. Investors are concerned that unmatched doses of liquidity could result in inflation spiking sooner-than-expected, an outcome that some Fed officials have predicted could happen later in 2021.A Trillion-Dollar QuestionIf the US signals another package, yields could shoot up, sparking a dollar bounce. Although the rebound could be temporary, it will be enough to trigger a tempest in EMs given the recent flows from passive funds in gigantic proportions. India has been one of the biggest recipients.Although US Federal Reserve chairman Jerome Powell pacified markets recently that the Fed is in no hurry to taper the bond-buying programme, through which it pumps $120 billion into the system every month, the concern is whether it would be in a position to ignore markets if bond yields surge.Investors still have bitter memories of the ‘Taper Tantrum’ of 2013, sparked by the comments of the then-Fed chairman Ben Bernanke on cuts in bond purchases, comments that triggered panic in the global financial markets. Bernanke had to retract his remarks to calm markets.This time, Fed officials could be careful to avoid a ‘tantrum’, but it would be a different matter if the pressure emanates from the markets. That does not augur well for overbought EMs, especially when the dollar is oversold.