Bull mkt over; bear hug is here to stay

New Delhi: The three-year bull run across global markets might be over, giving way to a full-fledged bear market, leading equity research firm Morgan Stanley has warned in its latest report.

Bombay Stock Exchange's 30-share sensitive index (Sensex) dropped more than 250 points on Tuesday to close below the key 10,000 point mark for the first time since February 17, 2006.

The Sensex plunged more than 13 per cent last month, tracking sluggish trends across the global markets and on concerns that FIIs have started offloading their position from the country on look out for better returns from other markets.

Morgan Stanley's Hong-Kong based economist Andy Xie said in a report that the four-year global growth boom might be over, as the liquidity boom and asset inflation are nearing an end.

The liquidity boom has been manufacturing strong growth through asset inflation - including property, credit spreads, commodities, and emerging market stocks.

However, as inflation picks up, the liquidity boom and asset inflation will draw to a close, Xie said.

Morgan Stanley said that massive fund flows from the "less experienced retail investors into hot-concept funds like BRIC, commodity, India, China" have led to a global financial mania in the past five quarters.

"The mania has formed in an environment of sluggish global liquidity. Gravity has stopped the momentum, and we think the unwinding is likely to continue," added the report.

When markets are hot, fund managers tend to market their funds aggressively, especially those ones with hot concepts, Xie said.

Tens of billions of dollars have been raised by such funds from less experienced retail investors over the past three quarters in markets like Japan, Korea, Taiwan, while fuelling rapid price appreciation in the recipient markets.

However, inflationary pressure in the US and other OECD economies makes a cyclical bear market likely beyond the ongoing unwinding, the report said.

Morgan Stanley said that the central banks in the US and other OECD countries are likely to further hike the interest rates and keep them higher for longer than expected.

This would lead to a decline in global liquidity and a contraction in the risk asset valuations.

A Morgan Stanley economist said that a financial hard landing is the most likely conclusion of the current bull market, while an economic soft landing was also possible.

The emerging equity markets and commodity markets have been among the major recepients of funds from long-term investors who have failed to generate big returns in the US.

However, such funds have flowed disproportionately into small and illiquid stocks, causing them to rise multiple times, Xie said.

According to the report, a mania does not last in a tightening liquidity environment and the May sell-off indicates towards gravity working on this bubble.

Xie said that the cyclical bear market in 2001-02 cleaned the excess capacity in the IT sector, while the excess liquidity flowed into emerging markets and commodities.

The report cautioned that Asia was unlikely to become a global growth engine and stand on its own despite a weak US economy.

There is a demographic obstacle to the developed part of Asia - Japan, Korea, Hong Kong, Singapore, and Taiwan - achieving vibrant consumption growth.