Ongoing recovery in markets is poised to extend longer: Elara Securities

In past 16 instances, Nifty bounced after a correction of over 10%

The ongoing recovery in the markets is poised to extend longer, if past data is an indication. Since 2006, whenever the benchmark Nifty has corrected 10 per cent or more, it has managed to recoup most of the losses within three months, shows an analysis by Elara Securities. 

There have been 16 such instances of fall in markets, including the 2008 Global Financial Crisis, and in most occasions it managed to claw back the losses within three months, the analysis shows.

Elara is expecting history to repeat itself. “We expect the market to rebound from current levels due to valuation comfort, easing of crude prices, a pause or deceleration in the rupee depreciation, and easing of market volatility,” say analysts at Elara led by Ravi Muthukrishnan.

The Nifty declined 15 per cent from its peak following consecutive months of correction in September and October. In the past two weeks, the large-cap index has managed to rebound 5.5 per cent from its eight-month low of 10,030, touched on October 26. On Friday, the index ended at 10,585.

Other experts say valuations have become slightly comforting after the fall. Nifty valuations had climbed close to 20 times its estimated one-year forward earnings. Currently, the index trades at around 16 times, which is closer to its long-term valuations. 

In addition, Brent crude prices have declined around 20 per cent from their four-year highs of $86 a barrel in early October. The rupee now trades below 73, compared to its all-time low of 74.4 against the dollar on October 9.

“During the 16 correction phases, Nifty on an average corrected 14 per cent and the duration of the correction was about two months. After correction, Nifty recoups the entire loss over a three-month period. The correction and recovery are steeper for mid-caps compared to large-caps,” says Elara in a note.

However, it is not a given that a market rebound is guaranteed after a steep correction. There have been instances where the recovery has been slow and prolonged.

For instance, following the corrections in 2012 and 2015, the Nifty took close to six months to regain its peak. There were four other instances when Nifty failed to reclaim its peak levels even after six months, shows the study.