Markets love central banks. Every time, there is crisis, global central banks come to market’s rescue with their open arms. Be it China chinks or Brexit, central banks come condescending to bless the markets with their all powerful bazooka (monetary stimulus/ quantitative easing etc). Like a child who exhibits behavioral problems from being over-indulged by parents, market is degrading into a spoiled brat. Now it is taking liquidity for granted. So is the risk-on trade that has come to engulf the emerging markets. EM allocations are on a high and have driven the indices to new highs in Emerging markets including India. What added fuel to the fire in India were the strong pick up in monsoon and rising hopes on policy actions. Given this, it is no surprise that bench mark indices are frantically close to all time highs.
In the process, blinded by liquidity, Indian markets have begun to ignore some potential risks. First and foremost, liquidity could reverse as quickly as it comes. Exuberant markets attract attention of central banks esp. US Fed which has been holding up hikes fearing volatility in global markets, though jobs data has been favoring hikes for a while. On taking comfort from rising markets, if Fed decides to push ahead with its rate hikes, it could potentially upset the ongoing rally by puncturing the liquidity bubble. Second, with earnings failing to recover in a meaningful manner, going by current earning season, markets have run far ahead of fundamentals. It is a question of time before it hits the speed bumps.
Third and more importantly, the oozing confidence (of market participants) on policy actions might fizzle out if the ongoing parliamentary log-jam persists. Market will watch out very closely on Govt’s ability to push thro’ GST. If it gets scuttled by the continuing log-jam, GST might never see the light till 2019. That will be a serious setback for the markets as well to the Govt. as it is in the fag end of the policy/ reform window with major state election looming next year. Investors can ill afford to ignore such risks, though markets habitually get mired in such risks blinded by liquidity. It is time to ignore markets, not the rising risks.