Given that the markets were battered severely, the recent stock market rally was due
Business Standard / New Delhi Mar 16, 2009, 00:03 IST
The trading sessions on Thursday and Friday saw a sharp rebound in stock prices, with the BSE Sensex gaining more than 7 per cent. After pulling out more than Rs 10,500 crore since the start of 2009, even foreign investors are believed to have started buying again. But too much should not be read into these developments; a rally was always on the cards, given that the markets have been battered and taken blue chips to two-year and three-year lows. To place matters in context, since January the market has lost 9 per cent, after the 52 per cent fall in 2008.
The immediate reason for the shorts rushing to cover their positions was the better economic news from the US—the chiefs of Citigroup, Bank of America and JP Morgan said their banks were becoming profitable once again. Since a key factor driving down the Indian equity market has been the global economy, such news is encouraging. But the global economy has a long way to go before things can be said to be normal. Furthermore, at home elections are round the corner and the market is pricing in a new coalition government led by either the Congress or the BJP. Should a fractious coalition without either of the two big parties come to power, it could be a setback for the markets.
There are several India-dedicated funds that are sitting on cash and which could have indulged in some bottom fishing. It is unlikely though that fresh allocations are being made for the Indian market. As for domestic institutions, insurance companies continue to be buyers whereas mutual funds have been sellers all along. In short, it is much too early to call a turnaround, or to say that the market will not seek lower levels again. To be sure, there have been some domestic signals pointing to sectoral recoveries. Automobiles did well in February, and cement demand is said to be strong, while steel has shown a levelling out. Domestic credit, after shrinking in the previous couple of months, has expanded in March. But industrial output fell in January, exports fell in February too, and it is too early for the easier monetary policy stance (which started in October) to have started taking effect. At 8,757, the Sensex trades at a price earnings multiple of around 10 times estimated 2009-10 earnings; the broader market may be even cheaper. These are modest price levels, and will encourage some bottom trawling, especially since many mid-cap stocks are going cheap by most market parameters. But although the current rally may have some steam in it, the chances are that it will fizzle out. For a sustained recovery, the country needs a stable government after the elections and firm evidence that the global economy is on the mend.
Dear sir
The editorial had drawn right inferences on the 2-day rally last week, though the primary trend of bear phase had not shown sustained weakness.In the near future, withoutfear of contradiction one can say that markets are not yet out of woods.Before resuming sutainable uptrend ,markets have to overcome several odds viz; visible signs of recovery from recession are not perceptible,poorQ4 results are expected to imact the market seriously,Political uncertainity with regard to the form of new government that takes shape after the impending elections,FIIs are hesitant to enter our makets due to volatile Re-exchange rate and SEBI's restrictions with regard to P-Notes.Hence investors had no hurry to invest.It may be a field day for day traders and speculators who have risk appetite.
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