The indicators are there: credit spreads narrowing, cross-border capital beginning to flow, GDP numbers surprising on the upside…  Ninteen months into the down cycle and we are happy to have finally turned the corner on one of the longest bear markets in recorded history.  The swiftness of the turnaround, however, baffles the lot of us.  But to term it as a bear market rally, may be the safe but mistaken thing to do.   

If you have been waiting for a solution to the very serious structural issues, especially in the US as a pre-requisite to a recovery, you will be dissapointed. A lot of observers have traced the current malaese to what has come to be known as the Greenspan Put – the US Fed’s proclivity under Greenspan to bail out its banks in any crisis.  This theory holds that the risk banks are bearing is not getting priced in, leading them to indulge in the worst form of moral hazard.  Needless to say, given the severity of the current crisis, there are a lot of takers for this theory.  And equally, with the large bail outs of banks again there should be no doubt that the Put has only been repriced and rolled over! 

The other theory talks to the unsustainable debt led consumption in the US, supported by a savings glut in Asian economies.  Now this is a compelling argument but untangling this equation would mean a kind of short term pain that no economy is in the mood for.  There is some welcome development in that the US domestic savings rate has gone up from a negative 3% to a positive 4%.  This is a change of mamoth proportions, for those familiar with US spending habits!  The American consumer is scared but equally, credit taps have been turned off to achieve this dramatic shift in a short time.  What is more, the ony wealth building avenue the American Consumer knows – his house, has negative equitywhich makes him feel poor in a very real sense and hence pull back his spending.  This is the October Shock that we saw translated to a precipitous destruction of demand across the world.  This also alarmed policy makers into thinking that any changes to the system has to be done with the engines running, the alternatve was just too painful, especially for the Chinese – the chief beneficieries of the debt led US consumption.  China capitulated, reassuring its faith in the US treasuries and as a consequence the Dollar.  The Obama administration in turn went about putting money in the consumer’s ATM (US housing) by targetting a 30-year-4% fixed mortgage, one of the lowest in history, to jumstart the economy.  It is therefore clear that we simply don’t have the stomach for the structural changes required to be put in place.   

The third important factor, off course, is that this is a stock market led rally, a leading indicator.  There is, therefore, no contradiction in saying that  the real economy will take a few more quarters to find its feet.  The economy will bounce back and work without making the underlying structural changes because it has been working that way for the last 10-20 years now, it can certainly go on for a few more.  It should be no surprise then that we have postponed the solution to another to go back to our old ways and that this stock market rally is for real! 

The one overwhelming concern investors had was around the event risk of a fractured mandate.  The results have been truly historic in their leaning towards national parties and the impact that can have on India s growth.  With the global economy languishing, India standards out for its growth and its relatively unscathed economy.  This would mean that capital would flow from the West to India.  Predictably, the markets have cheered with emphasis hitting an up circuit at open.  A lot of people were left behind when the rally began and most of them were waiting on a dip post elections.  The unexpectedly strong mandate has created a panic buying mentality that it is forcing the circuits.  Our readers will see it for what it is a strong signal that the cycle has well and truly began but there would most certainly be better occasions to buy into your favorite counters.  If you have missed the rally wait for a few days to enter.  This is very much a stock pickers market and will remain so for the next years.  The companies that will do well are the same companies that did well in the downturn - strong businesses.  There should be no doubt that the next cycle has began.  For investors waiting for the market to come up to start selling, this would be a good time to do so - the next two days especially.  Small companies that were driven up by momentum are unlikely to reach those levels again so be realistic about what you can get back.  Ensure that your portfolio is made of stocks that are likely to do the best in its underlying economics.  The overwhelming  positive of the mandate not withstanding, avoid deploying a lot of capital this week.  The markets have moved up with the global rally and now on its own for the last two weeks, so there will be some give back in the days and weeks ahead which is when you should be looking to enter.