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March of the Bull-Headed

Is the recovery nigh, or are bubbles being formed?

After playing the game of trying to time the markets to earn windfall profits, now, it seems, is the time for trying to time the emergence of the global economy from the ongoing slowdown and thereby earn money from it.

While some analysts say the turnaround will start to show in economic figures in the next 18 months, others are looking at a future that is a mere 12 months away.

While crystal gazing is not a crime, but when fund and stock analysts both recommend and start betting their investors money on these forecasts, then it surely leads to a lot of heartburn. And this happening within just months of some of the biggest and oldest banks in the world going bust, along with the money of the common investors, evokes surprise, to say the least.

The most recent entry into the game of prophesying a purple patch for the markets is a Merrill Lynch Fund Manager Survey, consisting of 220 managers covering 50 countries and managing a total of $617 billion, that insists the global economy has turned around. The survey approached investment experts across the world and took their views about their thoughts on the turnaround. Carried out in May, the survey found that out of ten managers, as many as seven believe that economic conditions will improve within the next 12 months.

According to them, the process of identifying, recommending and buying stocks has already started based on this assumption, mostly cyclical stocks that move up the most during economic revivals – their cash positions have already gone down from 4.9 per cent in April to 4.3 per cent now.

This is in stark contrast to October 2008, when six out of ten managers were saying there was every chance of economic conditions worsening. Surely, there is nothing showing in the fundamentals of global economy signifying that deduction. Perhaps, it flows from the fact that the US has devoted trillions of dollars in fiscal stimuli to jump-start their flagging economy, while China has announced a figure in hundreds of billions, while India too has looked at that, albeit in a very small, even tiny manner, with a stimulus of about 4 billion dollars.

Indubitably, what is driving this bullish mental make-up are the global markets which have been on the rise for the last two weeks, especially in emerging markets, where the BSE Sensex has gained by as much as 75 per cent since May 9. On the global front, the MSCI World Index of shares is up a more modest 3 per cent.

What most managers in the survey agreed upon was that China's economy would improve and thereby drive the overall change in the global economy. No wonder then that they are extremely bullish about investments in that region of the world.
However, the surveyors are looking to stand on two stools, they are saying that, especially for investing in emerging markets, the risk is rife of engendering a bubble-like situation again.

“Investors are finally opening their wallets and reducing cash balances to mid-cycle levels to buy equities, cyclical stocks and risky assets,” said Michael Hartnett, Bank of America Securities-Merrill Lynch co-head of international investment strategy. “However, this rush to take on risk, especially in emerging markets, is reminiscent of bubble-like behavior. A record net 40 percent of fund managers are looking to overweight the region in the next 12 months.”

Surveys like this may well drive investors to the markets to take the first movers advantage, but if the  markets drop, then they will be the losers again while the sellers at these high valuations, generally institutional investors, will pocket the money and then buy back in cheap as markets dive.

As we, at Value Research keep insisting basing your decisions on someone’s surveys, ratings et al is not recommended. What investors must do is take a look at their needs and goals, decide on a path to invest, take a hard look at the various investing options available and then start doing so in a slow and steady manner. So, when markets come down they will not provide the kind of shock that is impossible to recover from. The basic rules of investing still remain as strong as ever.

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