Global markets get a trillion-$ fillip from EU

Sensex ends 5-day losing streak as global central banks open liquidity gates and EU, IMF bail out Greece

INDIAN shares gained the most in Asia on global investors' euphoria after central banks across the world opened the floodgates of liquidity, and the European Union agreed to a trillion-dollar financial assistance to save the battered euro and debt-ridden member countries. 

    The actions revived memories of the days following the collapse of Lehman Brothers when easy policy measures helped revive investor confidence in markets and led to a surge in flow of funds to emerging stocks. 
    The global financial turbulence may be a blessing for emerging markets such as India as international investors would invest their cheap money in these nations to capture high economic growth. Their central banks may keep interest rates at record lows to prevent the financial systems and economies from collapsing. 
    "While there is no one-to-one correlation, the Greece episode will make the central banks persist with their easy money policy,'' said Saurabh Sonthalia, head of global capital markets, Bank of America Merrill Lynch, told ET. `This global liquidity will then flow to emerging markets and India in search of growth." 
    Sharp gains in index heavyweights such as Reliance Industries, ICICI Bank and Reliance Infrastructure lifted the benchmark Sensex 3.3% to 17,330.55. The 561-point surge is the highest since May 18 last year when it climbed 17% after Manmohan Singh returned to power. The Stoxx Europe Index soared 6.5% and the MSCI Emerging Markets Index climbed 4.3%. Foreign funds have bought stocks worth $6.3 billion this year. 
    Central banks in the US, Japan and the Bank of England opened liquidity windows and the European politicians set aside their differences to bail out debt-laden Greece, Spain and Portugal after the collapse of the euro last week. The EU agreed to a $980-billion assistance. Fed resumes dollar-swap line 
    THE US Federal Reserve resumed a dollarswap line with the European Central Bank (ECB), which said it would purchase government and private debt. Bank of Japan released ¥2 trillion into the financial system for the second straight day. 
    The crisis in global markets may have a bearing on the domestic markets too, but that may be temporary as the economic and earnings growth of companies are likely to be strong. 
    "In the short term, the stress in the system will be felt by India also," says Ramit Bhasin, MD & head-markets, Royal Bank of Scotland. "But in the medium to long term, the scenario could prove beneficial to emerging markets and India in particular. The India FII story is intact and the next 6-12 months could see increased flows." 
    Foreign funds net bought Rs 264 crore of shares on Monday, and domestic institutions Rs 30 crore. 
    Although Indian fundamentals may be stronger than developed markets, global investors are affected by common factors and there could be little room to be optimistic about prospects when the rest of the world is in trouble. 
    The steep valuations, with high price-toearnings multiples, may not support a strong rally either. Indian shares are trading at 16-17 times their estimated earnings for the current financial year, which most analysts feel are not attractive given the outlook for sharp rise in interest rates. 
    "If Europe is in trouble, it is likely to impact us all; it is unlikely that this scenario could see increased flows to India," said Bharat Iyer, executive director and head India equity research at JPMorgan Securities. "The anecdotal evidence lies in that over the 10-day period when European markets plunged, foreign investors pulled money out of India too. However, India could fare better than some of its peers in relative terms in case of a sharp slowdown in Europe." 
    The fall is seen by some as a necessary correction after the index more than doubled from its last year lows. The market is poised for a sharp rally, say some analysts 
    "Some of the volatility that is seen is exaggerated as we were on a huge upmove," said Mr Bhasin.