By Vishnu Makhijani, IANS
New Delhi : A “cold shower” will cool the overheating Indian stock markets but the adjustment period will be brief due to the strong fundamental growth of the economy, a US expert says.
“Markets get overheated during expansion and we need corrections to act like a cold shower to cool things off so that people begin to think rationally again,” says Robert F. Bruner, an academic at the University of Virginia and co-author of a best-selling book on lessons to be learnt from the stock market crash of 1907.
“Even if today represents the peak of the equity market in India, I think we would expect that the adjustment period would be relatively brief, given the very, very strong fundamental growth within the Indian economy,” Bruner told IANS in an interview.
Bruner is dean and Charles C. Abbot professor of business administration at the Darden Graduate School of Business Administration at the University of Virginia.
With Sean D. Carr, who also teaches at Darden, Bruner has co-authored “The Panic of 1907: Lessons Learned from the Market’s Perfect Storm” that appeared in September and became an instant bestseller. He has authored 17 books.
The Indian stock markets have been zooming for the past few months, with the sensitive index (Sensex) of the Bombay Stock Exchange crossing the psychologically important 20,000 mark on Oct 29. The broader S&P CNX Nifty also hit an all time high of 6,000 points.
This rise is largely attributed to unregistered foreign entities using the “participatory notes” route to ride piggyback on registered foreign institutional investors (FIIs) and pump in enormous funds into the Indian markets.
While FIIs and high net worth individuals and companies have also poured in huge sums of money through the legitimate route, it is largely the activities of unregistered foreign entities that drove the bourses up, market watchers say.
This has prompted the Indian markets regulator Securities and Exchange Board of India to serve notice on FIIs to square up the investments by these unregistered entities within 18 months, after which no such investments will be permitted.
According to Bruner, the issue was not just India’s stock markets but also “India’s position in the world”.
“It is a major source of productive activity and invention on the world stage today. So there are many good fundamentals that would suggest that if the correction is to come, the correction would either be rather shallow or not terribly long,” he contended.
Would the correction come from the market itself or through regulation?
“I think that corrections are always market phenomena. They are reflected in the exit of investors from markets and this is what drives prices down,” Bruner said.
“Too many investors run for the doorway at the same time. There is a decline in trading activity. For some securities, it is very difficult to find prices at all,” he elucidated.
Asked about the irony of the situation, that on one level, the strength of an economy is gauged by the robustness of the stock market and yet the finance minister had been expressing concern, Bruner chose to relate a homily.
“The question is, as we say in the US, the tail wags the dog, so we need to decide which is the tail and which is the dog. I think the correct way to think about it is that the real economy is the dog and the stock market is the tail.
“The stock market interprets what it sees in the real economy. Occasionally, the stock market departs from its senses and that is part of this period of over optimism that produces irrational exuberance, as (former US Federal Reserve chief) Alan Greenspan calls it,” Bruner contended.