If markets the world over are up sharply from their March 2009 lows, it's mainly liquidity that has driven them. India has been no exception; part of the money has found its way into the Indian markets.
But even otherwise, fund managers worldwide have been betting big on emerging markets since these have shown signs of recovering faster than the western economies.
For instance, in the week to October 23, around $4.9 billion found its way into Emerging Market equity funds -- the highest since December 2007.
Since March this year, investors have put in $51 billion into EM equity funds more than offsetting the withdrawal of $38 billion between October 2007 and February 2009 bear market.
Since January foreign investors have bought stocks worth $14 billion, pushing up the market 100 per cent since its lows of March 2009 and putting India in the league of the top five performing markets globally.
The sharp fall in the Sensex, of close to 500 points, on Tuesday did come as a bit of a surprise because while a correction has been on the cards, such a steep fall on a single day is always disconcerting. The manner in which some of the mid-caps were hammered suggested that investors were trying to get out.
Although the market is not cheap, the suddenness of the fall has more to do with technical reasons and rumours rather than any change in the perception of how the economy will fare.
It's true the September 2009 quarter earnings were somewhat mixed with operating margins turning out to be better-than-expected due to lower input and interest costs.
Also, realty results have disappointed, while profits for several banks were driven by treasury gains and there is concern of oversupply in sectors such as cement.
Indeed, although the economy may have weathered the worst of the downturn, the finance minister says the effect of the drought may be felt in the coming quarters, the recovery in exports is uncertain and commodity prices are hardening.
In short, the earnings upgrades aren't likely to happen in a hurry and moreover, even when it happens, it may not be an acrossthe-board kind of upgrade because sectors such as banks, telecom or even metals are likely to face pressures going ahead.
The upgrades so far have been made for consumer driven sectors such as automobiles or are a reset of some very pessimistic estimates made last year. Confidence will return when companies start to announce capital expenditure plans and the top line begins to grow.
The market has been running ahead of fundamentals and at 15,405, the Sensex trades at around 14 times estimated 2010-11 earnings.
That's not unduly expensive, though investors may want to be a little more sure that the recovery is for real and that a bottoming out of interest rates won't hurt growth.