Market Miasma: Growth Bubbles and Bearish Ides
Everything that fomented hubris is haunted by doubts and every argument is daunted by geopolitics. Nifty futures are in the red, Europe is expected to open lower and US indices which plunged on Friday are flashing red and amber. Analysts question growth and warn of a dot-com like crash. Scope for hope is crippled by Trump’s tariff threats and sputtering growth in Europe, China and Japan. Will Monday be a day or reckoning?
Shankkar Aiyar | The Third Eye | The New Indian Express | 23 Feb 2025
Podcast: Bubble Talk Follows Poor Macros and Geopolitics
Stock markets across the world find themselves propelled into a miasma of known and unknown fears. The past week saw bearish ides triggered by a chorus of doubts. Eerily, everything that fomented hubris is haunted by doubts — from exceptional metrics of tech stock valuation to perceptions of growth. Every argument is daunted by geopolitics and the chaos in Trumpistan.
This weekend, the chatter on Wall Street and Dalal Street is enveloped by the fear of bubbles bursting and a crash. Typically, the market moves in a herd. If exuberance is funded by folks chasing yesterday’s returns, the fear is that a crash could arrive as folks exit to cut losses as the market turns negative.
A Bank of America report warned of a bubble similar to nifty-fifty and dot-com eras — and that this could take down the S&P500 by 40 percent. Kallum Pickering, chief economist at investment bank Peel Hunt, points out that “the US economy resembles a textbook government debt-fuelled bubble”.
The twitches of the past weeks turned into tremors on Friday as data in the US cast doubts on the sustenance of the thesis of US exceptionalism. Weak consumption and worsening inflation expectations — the highest since 1995 — coalesced to trigger the bearish ides. Low-cost retailer Walmart lowered its forecast for the year and the bell-weather University of Michigan survey revealed a slide in consumer confidence.
Unsurprisingly, Friday saw benchmark American indices swinging from optimism to dire pessimism. The Dow Jones Industrial Average plunged over 700 points, the S&P500 slid over 100 points and the tech index Nasdaq Composite fell over 400 points. Stocks in Europe are expected to open down this week and the US indices are flashing red and amber.
It didn’t take long for the aftershocks to arrive on India’s coastline. On Saturday morning, the market was abuzz as the Gift Nifty was quoting in the red, at -289 points for Monday. India’s stock markets have already been hammered by selling pressure.
Just in January and February, foreign investors sold stocks worth over $11 billion or around Rs 1 lakh crore. Aggravation arrived with commentary on unrealistic valuations in small- and mid-cap stocks. Despite deep corrections, price-earnings ratios are still elevated for mid and small caps in relation to earnings — one market participant urged investors to stop putting money in systematic investment plans or SIPs.
While SIP flows have sustained the fear in the markets, among investors and funds, now is about stalling a reversal of flows into mutual funds as returns on investments are threatened. The return on indices for this year is negative and for the 12-month period is lower than that on fixed income.
The contest between domestic inflows and FII outflows is reminiscent of the old Bollywood quip of Ajit: it’s as if the markets are trapped in ‘liquid oxygen’, whence liquid is not letting hope live and oxygen is stalling its death.
The thesis of Indian exceptionalism was busted following the release of the second quarter’s GDP data. Further validation has arrived — in the Reserve Bank’s lowering of India’s growth, the dip in advance GDP estimates released this month and forecast for the coming financial year. Third-quarter results from the corporate world didn’t spur hope either — this week, analysts at Motilal Oswal dubbed the results the worst in 19 quarters.
Thanks to the uncertainty and regulatory cholesterol, Indian companies — who are sitting on cash reserves of over Rs 7 lakh crore — have chosen not to invest. Add the slide in net foreign direct investment; in the April-December 2024 period, net FDI was down to $1.2 billion. The impact is manifest in data and forecasts.
It is scarcely surprising then that analysts at Nomura downgraded growth forecasts for the current fiscal to 6.0 percent, lower than the government estimate of 6.4 percent, and to 5.9 percent for the next fiscal, lower than the government’s 6.3–6.8 percent.
The inadequacies of India’s economic policies are worsened by the travails triggered by Trump’s tariff tamasha and fears of a slowdown or recession in the US and elsewhere.
A litany of studies validate that protectionism pushes up inflation, and lowers growth and employment. Trump’s tray of tactics — tariffs on basic inputs, reciprocal levies, retaliatory taxes, and the much-discussed idea of a border tax as tariff — are expected to kick in the next few weeks. These will upend fiscal and monetary math and entrench uncertainty.
Thanks to the parade of political populism, global growth is far from stable. This weekend, Germans will vote for a new government, whose outcome will inform and influence growth in the world’s third largest economy. Europe’s GDP growth for 2024 was sub-par — with the fourth quarter registering a measly 0.1 percent.
Beyond the exuberance of DeepSeek’s success, GDP growth in China is a question between answers; its troubles in the realty sector or domestic consumption are far from sorted. The Japanese economy sputtering at pre-pandemic levels is also vulnerable to the tariff threats.
Come Monday morning, the markets will inform the world about the state of the global economy.
Tailpiece: For 20 months, a minister in Punjab was in charge of a section that does not exist. The name? The department of administrative reforms. Talk about systemic apathy!
Shankkar Aiyar, political economy analyst, is author of ‘Accidental India’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’.
You can email him at shankkar.aiyar@gmail.com and follow him on X / Twitter @ShankkarAiyar. This column was first published here. His previous columns can be found here.
