Stock market bulls mock central bank fears

This week the chiefs of the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan met at the ECB Forum in Sintra, Portugal.
For representational purposes
For representational purposes

One of the most profound observations about life is enunciated in the Mahabharata. In the section Aranya Parva, Yaksha asks Yudhishthira what is most mystifying or wonderful in the world. Yudhishthira points out “Day after day countless creatures are going to the abode of Yama, yet those that remain behind believe themselves to be immortal.” The world is perpetually split and moving between fears of mortality and hopes for immortality.

This week the chiefs of the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan met at the ECB Forum in Sintra, Portugal. The message: inflation is sticky, more restriction is required, more rate hikes will follow and it is not clear if recession can be avoided. The message added to the cacophony of cautionary advice and fears.

The warnings, however, are bouncing off the bulls. In 1998, as headlines screamed worries following the Asian Contagion Peter Lynch, the legendary investor, said famously: “The world will be OK. I have read the constitution. I’ve read the bill of rights,” and added that he didn’t see anything which said there must be a recession. Stock market bulls are as dismissive as Lynch and are scoffing at central bank theories. Take India where the BSE Sensex and the Nifty 50 – benchmark indices – touched new highs.

The Sensex rose 804 points and closed at 64718 and the Nifty50 rose 216 points to close 19189 points. The highlight of the surge in India is the emergence of a banking behemoth comparable to global giants. HDFC Bank following the merger with the housing finance giant HDFC is now valued at around $ 172 billion. It will be the fourth largest bank ahead of Morgan Stanley and behind J P Morgan, Bank of America and ICBC. The merged entity will rank 63rd, up from 94th on the world market cap rankings.

India is the fastest growing large economy and given FII inflows of over $10 billion in this fiscal arguably the rise in valuation is explainable. Fact is despite headline attention, Sensex and Nifty50 are up by less than 7 per cent in calendar 2023. In stark contrast, indices in Europe and the United States -- where recession is forecast to be round the corner -- the S&P 500 is up 15 per cent, the NASDAQ is up 32 per cent the best first six months since 1983 and Euro Stoxx is up 15 per cent.

For sure the tech sector in the United States did slide into a downturn last year reflected in the pink slip series resulting in thousands being laid off. This afflicted its valuation resulting in the NASDAQ sliding by over 33 per cent in calendar 2022. It could also be argued that its rebound in 2023 is powered in part by the promise of generative AI. Europe scarcely has an AI halo around its story.

And despite fears about the poor recovery in China’s growth, the German DAX is up 15.3 per cent and the French CAC 40 up 14.3 per cent. Stocks in the advanced economies have reported double digit returns. In the US, where the US Fed has hiked rates for 12 months in a row, stock market indices are positioned to finish at their highest in 14 months. The saga is best expressed by the stock valuation of Apple. The market value of the blue chip touched $ 3.1 trillion this week – if Apple was a country and its valuation the GDP, it would rank the sixth largest economy in the world.

And unlike other tech stocks, Apple had no great story to speak of on generative AI. Despite setbacks and criticism of performance in China Apple shares are up 55 per cent for the year to date period. Global economies are witnessing a paradoxical cohabitation of central bank pessimism, stock market optimism and robust private consumption and demand. Consumer confidence in the US is the highest since January 2022. Moody’s Investor Service estimates US companies are sitting over $ 2 trillion in cash.

The buoyancy is reflected in the revision of US GDP for the first quarter from 1.3 to 2 per cent. It raises question on the efficacy of rate hikes given the level of money pumped and flowing through the system. On Monday, IMF deputy Managing Director Gita Gopinath spoke about “Three Uncomfortable Truths for monetary Policy” at the ECB Forum. Gopinath invoked imagery from Samuel Becket’s play ‘Waiting for Godot’ to make her point.

The three truths: inflation is stickier; policy action could aggravate tensions between price and financial stability objectives and the likelihood of upside inflation risks. On Wednesday, ECB chief Christine Lagarde coined the phraseology of “lingering inflation” and US Fed Chief Jerome Powell stated that he didn’t see inflation coming down “to 2% core before 2025.” The real uncomfortable truth is that structural issues are fuelling persistent inflation -- Brexit in Britain, demographic shifts in the US and Europe, the geopolitics of pricing of energy and goods and resistance to labour mobility in advanced economies.

The context begs the question if the 2 per cent target is honest and realistic. The assertions of persisting with higher rates signal implications for global growth – particularly in developing economies. The time has come for honest informed debate. This September the Heads of State will meet at the G20 Summit to be held in New Delhi. It would be a good place to begin the conversation.

SHANKKAR AIYAR

Twitter: @ShankkarAiyar

Books:

Accidental India: A History of the Nation’s Passage through Crisis and Change

Aadhaar: A Biometric History of India’s 12-Digit Revolution

The Gated Republic – India’s Public Policy Failures and Private Solutions

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