Keeping the Markets Honest | Value Research Irrational exuberance has been stamped out in the recent market declines

Keeping the Markets Honest

Irrational exuberance has been stamped out in the recent market declines

Investors are disheartened by the stop-start progress of the stock markets over the last two years but I think that there’s a silver lining to this—it has kept the markets honest. There are many ways for a market to be dishonest but the one I’m referring to is the tendency for sectors and stocks to get inflated without any justification. The repeated small setbacks that the broad markets have faced since mid-2009 have tended to be regular deflators in such cases.

Whenever there has been an unalloyed bull-run for a couple of years or more, some sectors and some stocks have had unlikely stories spun around them. At various points of time, we’ve had long bouts of story-led waves of investing which have resulted in investors buying into stocks that have turned out to be decidedly poor investments. Technology, infrastructure, realty and even PSUs have been the flavours of the day at different points of time.

One of the great things about the period since mid-2009 has been that nothing of the sort has taken hold. Mind you, if you take a holistic view of this entire period, there’s not much to complain. Since 12 June, 2009, when the stock markets were through with the initial post-election rally, the large-cap indices are up about 17 per cent, taking into account the recent declines. By itself, this is a healthy gain. What makes it healthier is that it is gradual and has been punctuated by periodic declines (even panics, like the current one). In October 2009, then in January 2010 and then again in April and November, there were episodes when the indices dropped by 5 to 10 per cent.

In each of these declines, any incipient signs of irrational exuberance have been stamped out. Despite, the general gloom that has descended upon stock investors over the last few days, I’m quite positive about the way things are going. The period since June 2009 has actually been one in which we have had steady and completely justifiable gains at a very reasonable rate.

This column first appeared in the Hindustan Times on January 17, 2011

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