Has the sun finally risen on the global economy?

Its obvious this question must have arisen in a lot of investors minds, especially considering the way most asset class prices have rallied over the past 3-6 months. Is the sub prime crisis and its spillover effects well and truly behind us? I do not believe that's the case, atleast not yet.

To put things in perspective, its the fact that things are getting "terrible" from a "disastrous" state 9-12 months ago. Which means there still exists scope for pain ahead in global financial markets. It also needs to be remembered, the huge gush of liquidity brought in by several central banks might already be setting the stage for the next bubble. However, we could be a few years away yet from the formation of a new bubble.

The problem areas still remain strewn over different geographies and asset classes. In terms of geographies, the UK and Eastern Europe come to mind. Debt and mortgage levels remain high across both regions, Eastern Europe had been in particular focus due to problems with the Latvian economy. The US housing market still faces high inventory levels notwithstanding the recent positive numbers. Currencies also seem to indicate low confidence in the present rally, which is illustrated by the lack of upside momentum against the US Dollar.

Another important charachteristic of this rally has been this has been driven by "expectations". What happens should these expectations be disappointed? It is notable to state almost all asset classes i.e stocks, bonds, currencies, commodities have all rallied at the same time. Such rallies do tend to shake the belief of the most seasoned investors who have a defensive approach, let alone a guy like me who is still on the learning curve.

Adopting contrarian positions in such times is likely to be extremely rewarding, albeit there could be some amount of pain in the short term. Examples could be taking profit in equities and buying the US Dollar. Its almost a consensus view that the US Dollar is likely to weaken, even a slight strengthening of the US Dollar in the event of any new crisis is likely to send the cat amongst the pigeons. Though its difficult to pinpoint what the new crisis might be, a crisis of confidence in government debt (of Eastern European countries for e.g.) or even a currency crisis does not seem far fetched. Noted investor Jim Rogers believes the world is likely to see a currency crisis sometime in the near future.

So what would i be doing? Well, all a small investor like me can do is take profits on equities, wait and watch. The dawn might be here, but we are some way away from the sunrise as yet!

Watta damp squib!!!

That was the reaction i had after listening to the Finance Minister's budget speech.Even as the speech was only halfway through, i had the feeling markets would sell off. And even at this moment, the benchmark indices have shown a big thumbs down to the budget the Nifty down 209 points and the BSE Sensex down 700 points.

The budget was a reality check for investors who thought big bang reforms were almost a certainty, given the thumping majority for the UPA in the general elections. What caused the sell off?? The primary reason in my view is a lack of action on two major areas 1) Infrastructure spending 2) Disinvestment. It was expected infrastructure spending would be upped significantly, though there was an announcement of increased spending it did not have the tone markets were expecting. Disinvestment was by far the biggest disappointment. The fiscal deficit is also expected to be higher than was anticipated by the markets. Foreign direct investment and the lack of clarity on the fuel pricing mechanism were also significant negatives.

I am not surprised if we see the Indian market cracking further under the weight of selling pressure, especially from FII's. What was touted as a dream budget, turned out to be a nightmare on account of inaction, well almost!! Needless to say investors who were shouting from roof tops on the renewed potential in India are likely to have a relook at their stance. Clearly the market had run ahead of itself in amassing expectations, there was a risk even a small deviation from expectations would result in a sharp knee jerk reaction. And this seems to have materialized. It needs to be remembered the Indian story is still intact, the short term weakness is a readjustment to reality.

What next from here? I expect the Indian market to possibly undergo a re-rating, even slight de-rating in the short term as brokerages review their "outrageously" bullish outlooks in the post budget scenario. Banks and infrastructure are two sectors which look vulnerable to me in the short term, especially after having witnessed sharp run ups over the past few months.

Global markets pose another significant risk to the market performance going ahead. True, the global risk always persisted somehow the domestic market performance was somewhat oblivious to international markets given a strong emphasis on India being a "domestic demand" driven economy. This hypothesis will surely be tested over the next 9-12 months. Meanwhile, the best thing to do for now is to wait and watch how the market behaves after the initial reaction which might last about 4-5 days.