Global equity prices, led by US and Indian stocks, are at a record high, signalling a worldwide improvement in economic activity despite political uncertainty and rising protectionism.
From the election of Donald Trump as US president to the imminent exit of Britain from the European Union (EU), the last few months have been one of the most politically volatile periods in world history.
Trump’s brand of politics has underlined a common resistance to free movement of goods and labour – protectionist policies that have reverberated elsewhere in the world.
Any tentative recovery in the global economy is also at risk from other factors. Decelerating global trade (down from 2.7% in 2015 to 1.9% last year, the lowest since 2008) and firming commodity prices, especially of oil (up 60% year-on-year), could mean that surging investor confidence is just market froth, warn experts.
For now, though, investors have kept faith, propelling the US benchmarks, including the Dow Jones which is at its peak of 120 years. Global markets have taken the cue.
The optimism arises from a synchronised improvement in economic activity taking place not just in the United States but across the world. In the US, a fiscal stimulus package promised by Trump and lower-than-expected tightening of interest rates by the Federal Reserve are driving investor sentiment.
Europe’s Purchasing Manager’s Index, which gauges factory output, is at a six-year high while the Japanese economy is chinning up with monetary stimulus.
{{/usCountry}}Europe’s Purchasing Manager’s Index, which gauges factory output, is at a six-year high while the Japanese economy is chinning up with monetary stimulus.
{{/usCountry}}Together, they appear to be offsetting the political uncertainties around the world, analysts said.
“Globally, there are indications that the real economy is doing well -- be it in the US, Europe or in Japan,” said DK Joshi, chief economist with rating agency Crisil.
In India as well, the stock market story looks rosy, despite the shock recall of high-value banknotes by the government in November.
Both Sensex and Nifty are up 6.4% each in the month till February 22, according to data compiled by Deutsche Bank.
The two benchmarks grew faster than the European and Asian indices. UK’s FTSE-100 was up 2.1%, the German DAX 3.9% and the French CAC-40 1.5% while Japan’s Nikkei was up 2.6% and Hong Hong’s Hang Seng 5.7%.
India beat its BRICS partners as well. Brazilian shares were up 6.3% and China 4% while Russia was down 1.9% and South Africa 1.8%.
One of the factors helping up Indian share prices is the additional liquidity in the banking system after the November 8 demonetisation of 500-and 1000-rupee bills as investors picked up mutual funds, insurance and pension funds, said an economist with a leading foreign bank requesting anonymity.
Joshi concurred, saying, “There will be a pent-up demand due to rapid remonetisation.”
A NEW EQUITY CULTURE
In the US, Dow Jones Industrial Average has risen close to 5% in the month after Trump walked into the White House on January 20, while the broader S&P-500 rose 4.3% and the tech-heavy Nasdaq climbed 5.5%.
The US benchmark indices rose on expectations of stepped up spending on infrastructure and Trump’s election promise of slashing corporate tax from 35% to 15%. Investors are awaiting major announcement to this effect on Tuesday.
In India, analysts predict more people will invest their savings in stocks as the equity culture spreads to smaller towns in the coming years.
A new Deutsche Bank report said Indian households’ equity investment can double to $20 billion annually in the next three years.
“The architecture of the financial savings of Indian households is undergoing a structural shift. This has already been witnessed in the rising share of financial assets in (household) savings from 32% in 2011-12 to 40% in 2014-15,” said Abhishek Saraf, the author of the report.
Over the last three months, Indian benchmarks were among the best performance with the Sensex up by 10.8% while Nifty gained 11.1%.