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August 11, 2009

Market Recovery: The View from 3 Different Camps

In a column for the Economic Times, Morgan Stanley's Ruchir Sharma highlights 3 different viewpoints that investors have regarding the global market recovery.
Camp 1: This is it, nothing comes next. While the inveterate bears are willing to concede that the worst is over, they believe that any recovery will be shallow since the still over-indebted global economy will take a long time to work off the excessive leverage in the system. The bears argue that the US consumer has just about begun the process of deleveraging and will refrain from any major new spending until the personal savings rate gets back to the historical norm of 8% from 6% currently.

...Camp 2: The cyclical bull market still has some way to go. This camp is willing to acknowledge the structural problems that plague the global economy but thinks that concerted policy actions by governments across the world will lead to at least a one year-long economic upturn. The cyclical bulls say a simultaneous expansion in the global economy is well underway with the US too coming out of a recession. The momentum should be strong enough to take the S&P 500 back to the pre-Lehman level of 1,250 before both economic growth and markets run into structural headwinds again.

...Camp 3: A full-fledged economic recovery is underway. The outright optimists argue that the discussion on the global economy’s future is much too US-centric and that in turn exaggerates the negative effects for the rest of the world arising from the relative decline of one major power. Back in the late 1980s, Japan’s economy too had become the biggest contributor to global growth, and its stock market accounted for half the world’s market capitalisation at its peak in 1989. Still, a sharp fall in Japanese economic growth and its stock market did not unravel the global economy.

...My tent is still pitched with the second camp: a cyclical upturn and a bull market this year followed by some sort of a relapse next year as structural problems of excessive leverage come back into play. But we all need to retain the flexibility to switch camps at the slightest sign of incremental change, especially with many financial market indices back at the pre-Lehman levels. For markets to move higher hereon, economic data needs to keep surprising on the upside for as goes the global economy, so go the markets.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at