The Invincibility of Nifty

It has been very frustrating of late to see Indian markets moving up while the global market are crashing. I have pasted a chart comparing Nifty with Dowjone Index. 

As we can see from the chart that American index and global market topped around September 2007 while Indian market kept on going higher till January 2008 and topped on 14th January 2008.

I believe that the similar pattern is being repeated this time as marked by another white circle. We can see that Dowjone have cracked while Nifty is still moving up. I think it’s only a matter of time before Nifty finally catches up with rest of the global index and starts falling.

Now days you must be hearing a lot of noise about the inherent strength of Indian economy and its long term growth rate compared to a stagnant USA. All these nonsense is nothing new and was there in 2008 as well. 

The truth is that in long term definitely our economy are going to decouple but in short term we are still too closely linked due to our dependence on foreign inflows. If they decide to pull down their money due to risk perception our markets can crash like a pack of cards. 

All the analyst or strategist who are talking about growth rate and rising EPS sees only the return part of the equation. They forget that in markets you have to encounter risk before you get returns. 

According to me the current global environment is fraught with systemic risk. Anyone who is watching the global markets must be aware that Europe is insolvent. US consumers are highly leveraged and US GDP growth is stagnant at best. 

As far as China is concerned no one can trust their number. They are completely export dependent economy. If China grew 11% last year it was due to hectic construction activity taking place. Once you have invested and built your infrastructure you are not going to replace that portion of GDP time and again. Moreover the unprecedented surge in credit which occurred in China has resulted into massive mis-allocation of capital and will create severe problems for the banking sector. 

China and Europe are the major risk centers in the world as of now and they can trigger a hole in the global asset market not just equities. 

I believe that it’s only a matter of time before we will see implosion of Chinese economy and explosion of European economy which will result massive correction in every asset class. Caveat (I am not sure about Gold and I am bullish on its prospects although we can see a correction in that as well.)