30th March, 2009

Indian markets in 2009 have fared slightly better than the US and other markets. We’ve also seen some buying by FIIs in the past two weeks. BSE Sensex has bounced up almost 23 percent and is sitting pretty at 10000 levels. Is this the beginning of another bull run in Indian stock markets or is it a false alarm again? The previous four up moves in the equity market recently fizzled out even before they really began.

This is the question on top of every stock market investor's mind. Let us examine the previous bear runs in the stock market and get a perspective about what to expect.

After the 1994 crash most investors expected that stock markets will rebound by 1995 and even new investment funds were launched during this period. The actual recovery took much longer than anticipated. Generally a three year period for recovery is a safe bet.

In the 2000 bull market the Sensex high was at 6000 made in March 2000. The stock market crashed after that. It took four years for the index to touch 6000 again. Thus the average recovery period of three to four years seems a correct assumption. We are already through 15 months of bear market and I think it might be another year and a half till we see a major Bull Run commencing. This means we will see some solid recovery in the stock markets by end of 2010.

The current rally in stocks depends on lot of factors to sustain it.

US recovery:

Investors and bankers are keenly watching US economic figures. India is not decoupled from the global economy as yet. For the ongoing rally to continue, economic data over the next few weeks and months would have to support the view that the US housing and consumer markets are bottoming out after their recent collapse. The US economic bail out plan (Geithner plan) needs to rid the US banks of the toxic assets to be successful

Indian Economic Revival:

The numbers coming in from the Indian reality, steel, Auto, cement sectors have been encouraging and hence the stocks in these sectors have seen some gains. Similarly the stabilizing commodity prices have given hope that consumption might be reviving in metals and petrochemicals.

There is a possibility that this uptick might be temporary blip in an otherwise sagging economy. These numbers could have been the result of increasing government spending in the run up to the elections. A lot will depend on how the monsoons behave and the agriculture output.

FII inflows:

FIIs are a key factor in the revival of stock market and investor sentiment. Despite the meltdown in the stock markets Indian retail investor has not jumped in to invest. The current stock market rally has been kept alive mainly by FIIs turning net buyers in stocks.
FII buying has resulted in Rs 2,405 crore of net purchases since March 9.

Although it is still early days, analysts see signs of a revival in global risk appetite for the first time since October, with investors looking to re-allocate money to stocks in emerging markets.

To sustain the current rally needs lot of good news on all the economic and political fronts. IT seems this rally may sustain for a couple of weeks more and the Sensex may rally another 5-10 percent from the current levels.