2009 STRANGE YEAR FOR STOCK MARKET

2009 was an extremely strange and trying year for stock market investors. It started with 'fear' as the buzzword. Stock prices across the world were on their way down. Investor dumped their holdings as if the world was approaching the death of equities. Now as we close in on 2009, fear seems to have vanished. Instead, greed of more returns in 2010 has emerged as the key underlying theme.

So, what according to you has been the biggest lesson one can learn from 2009?

We believe it is that the investors would be doing themselves a great disservice if they continued to believe in the Efficient Market Theory at all times! Simply put, an 'efficient market' is nothing more than the statement that stock prices fully reflect all available information. But the experience of 2009 clearly suggests that markets could well be highly inefficient.

After all, if markets were efficient, everyone would have known of the rally that was about to begin in March 2009. But everyone didn't! If markets were efficient, we wouldn't have seen extreme despair and then extreme optimism in a space of just a few months. But we saw that!

As we stand now, the world seems a much optimistic place, especially as far as stock market investing is concerned. The markets are on their way up and business channel experts predict even better times. (remember that these very people were predicting doom at the start of this year!).

So, are the markets right this time around? We don't know. But going by history, it's always better to be cautious when your neighbour and even his aunt are all greedy about 'more returns from stocks in the next few months'!

Stock markets around the world have witnessed a spectacular rally in 2009. What is more, the buoyancy in BRIC markets in particular stands out the most. As reported in Barrons, EPFR Global has highlighted that inflows into emerging-markets equity funds are at all-time highs of US$ 75 bn so far this year. This is up from US$ 54 bn in 2007.

The reason for the same is not hard to find. Developed countries have been mired in recession for some time now. Hence the focus has shifted to emerging economies where growth is expected to far exceed that in the rich nations.

However, the real question is whether emerging economies have witnessed any meaningful growth in corporate earnings. The answer is - no! For all the profit potential of these emerging nations, some two-thirds of their equity outperformance in recent years has come not from earnings growth but from expansion in price-to-earnings multiple and a weaker dollar. Nobody doubts the long-term growth potential of the emerging markets. But we believe that this growth has a certain price attached to it. And at present, this price seems to be running ahead of fundamentals.