This rally could last long

Thu, 23 Sep Pre-Open

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348 days. Yes, that's correct. It has taken a whole of 348 trading days for the Sensex to go from 17,000 to the 19,000 levels. And how long has it taken to go to the next 1,000 i.e. the elusive 20,000 mark? Well, just 8 trading days.

This is what liquidity can do to a market. There certainly hasn't been a sea change in the fundamentals of the economy that coincides with the quick run up from 19k to 20k. It is just that investors, predominantly FIIs, seem to have had a big change of heart with respect to the Indian growth story.

Suddenly, 21k, a mark that looked so elusive a couple of months back, looks well within reach. Thanks to the Fed meeting recently, such a scenario looks even more probable now.

The US Federal Reserve has said that it is willing to ease monetary policy further to boost the economy. Furthermore, it has also agreed to keep interest rates low i.e. in the range of zero to 0.25 percent for an extended period.

The inflation in the US has remained subdued. And this had a lot of experts predicting that the Fed would restart the asset purchase program where it already has a portfolio of close to US$ 2 trillion. But the Fed seems in no mood to let people lose confidence in its ability to shrink its balance sheet and prevent a surge in inflation. This is the reason it refrained from another round of asset purchase.

However, liquidity in the US financial system is still plentiful. Even if banks start lending a small portion of it and if the same percolates down through to the system, asset prices will receive a good deal of boost.

As far as India is concerned, given its strong fundamentals, we would not be surprised if still more money flows into Indian equities. The stock markets here may not be in bubble territory right now. But few more billions of dollars and we could well be there. In fact, we will not be surprised if the index cross the previous highs in very short time and goes on to go even higher. However, that may not be the time of uncork the bubbly but to be more cautious than ever.

We are not saying that India will not deliver the goods over the long term. But a higher entry point in Indian stocks could undo years of strong earnings growth. And it is this factor that has to be kept in mind at all times. Insisting on a margin of safety at all times is indeed one of the cornerstones for successful investing.