Stock Market Rally-Will It Sustain?
Rama Krishna Vadlamudi, MUMBAI
May 10, 2009
The stock markets have, of late, been going through a period of purple patch. Since the early part of March this year, stock markets around the world have rallied strongly giving positive returns of 30 to 50 per cent (yes you heard it right, that is an annualized return of between 180 and 300 per cent!) depending on which part of the world you belong. The stock and commodity indices have been evocative of the positive sentiments in the financial markets towards an economic recovery that is expected to usher in much earlier than anticipated. The governments and central banks have taken strong measures and pumped in huge liquidity into the financial system.
In India, BSE-Sensex has recorded a remarkable recovery of 46 per cent from its recent low of early March 2009, reaching a level of 11,876 on May 8, 2009. A detailed analysis is given in the following three tables for different time periods.
BSE INDICES - TABLE 1 BSE-Sensex has given a phenomenal return of 46 per cent between the recent low of March 9, 2009 and now, whereas real estate index, metal, bank and capital goods indices have been top performing indices with returns of 81, 79, 65 and 56 returns. Defensive sectors-IT, PSU, HC and FMCG have been at the bottom of the sectoral indices during this period. It may be recalled that the top performing sectors, like, real estate, metal, bank and capital goods were among the worst performing sectors between the peak of Jan. 08 and the recent low on March 9, 2009 (see Table 2). Due to their gross underperformance during that period, these sectors have shown remarkable recovery between the recent low of early March 2009 and now.
INDEX 08.05.09 % return since recent low of Mar.9, 2009
SENSEX 11 876 46
MIDCAP 3 770 48
BSE-200 1 403 46
TOP PERFORMERS: SECTORAL INDICES
REALTY 2 356 81
METAL 7 950 79
BANKEX 6 007 65
CapGoods 8 507 56
BOTTOM PERFORMERS: SECTORAL INDICES
FMCG 2 093 16
Healthcare 3 123 24
PSU 6 098 30
IT 2 725 35
BSE INDICES - TABLE 2 BSE-Sensex has fallen by 60 per cent between the peak of January 2008 and the recent low of early March 2009, whereas sectoral indices, like, real estate, metal, capital goods and bank were among the worst performing sectors during the same period losing 90, 78, 72 and 68 per cent respectively. Defensive sectors, like, FMCG, HC and IT were among the top performers between Jan. 08 and early Mar. 09.
INDEX 09.03.09 % return since peak of Jan. 08
SENSEX 8 160 60
MIDCAP 2 553 74
BSE-200 963 64
TOP PERFORMERS: SECTORAL INDICES
FMCG 1 803 22
HEALTHCARE 2 519 43
AUTO 2 599 54
INF. TECH. 2 025 55
BOTTOM PERFORMERS: SECTORAL INDICES
REALTY 1 304 90
METAL 4 439 78
CapGoods 5 453 72
BANKEX 3 633 68
BSE INDICES - TABLE 3 Even though, BSE-Sensex has recovered 46 per cent (see Table 1) till now from the recent low of March 2009; it is still down 41 per cent from its peak of Jan. 2008. From the recent lows of early March 2009, the real estate, metal and capital goods have recorded a rise of 81, 79 and 56 per cent (see Table 1). The important thing to note is that they are still down 81, 60 and 57 per cent between Jan. 08 and now as can be seen in the Table 3. Investors who invested during the peak of Jan. 08 have seen, even now, an erosion of more than 80 per cent of their wealth from these real estate stocks, like, DLF, Unitech, etc.
INDEX 08.05.09 % return since peak
of Jan. 08
SENSEX 11 876 41
MIDCAP 3 770 61
BSE-200 1 403 47
TOP PERFORMERS: SECTORAL INDICES
FMCG 2 093 10
HEALTHCARE 3 123 29
AUTO 3 652 36
OIL & GAS 8 469 36
BOTTOM PERFORMERS: SECTORAL INDICES
REALTY 2 356 81
METAL 7 950 60
CAP. GOODS 8 507 57
POWER 2 176 52
The question that is now exercising the minds of investors is: whether the current rally in stock market will sustain for long? While there are no easy and straight answers to the question, experts have been circumspect about the medium term sustainability of the current rally, described by some as a bear market rally.
GLOBAL MARKETS: The Down Jones has given a return of 31 per cent in the last two months, whereas NASDAQ Composite and S&P 500 have shown a positive performance of 37 per cent each. It is interesting to note that the yield on the benchmark 10-year US Treasury has gone up, in the last few months, by more than 100 basis points to reach a level of 3.28% on May 8th. It is reflective of the higher risk appetite for riskier assets like equities and commodities in the US as well as other world markets.
FII FLOWS TO INDIA: The foreign institutional investors (FIIs) have brought in net investments of around Rs 10,650 crore or USD 2.14 billion between March 1st and May 8th. This massive inflows from FIIs has helped the Indian stock market showing an almost 50 per cent recovery in the past few months. Global risk appetite for equity markets has gone up substantially in the recent past.
IS IT TIME TO SELL AT EVERY RISE?
While it is difficult to predict the peaks and troughs in the financial markets, it is clear from the currency rally that investors’ sentiments have been aroused by some positive factors, like, positive results from corporate results in the US, strong policy actions from the central banks by cutting interest rates aggressively and pumping in huge liquidity and the latest stress test results which are perceived to be positive by the markets. Indian markets have seen a bit of profit booking on May 8th ahead of the elections results slated for May 16th.
So far, Indian markets have shown strong correlation to the world markets. The correlation may prove to be less pronounced in the next two months due to our own domestic compulsions; like, uncertainty about central government formation, huge government borrowing in the first half of 2009-10, concerns about weakness in exports, job losses in export-oriented sectors, weak corporate performance, shortfall in tax collections, etc. At this point of time, risk-reward ratio in the stock market is turning towards higher risk. It is always better to leave the last leg of rally to professional traders. Downside risks from now are very much high in view of the fact that many stocks have already rallied between 50 to 70 per cent in the last two months.
Sensex faces strong resistance at 12,600 level: During the May 2006 stock market crash, Sensex plunged 30 per cent from a peak of 12,600 on 11.5.06, to 8,900 on 14.6.06 in just one month – such is the severity of stock market crashes. It is always better to exit from fundamentally weak stocks during every rally for one may not get any opportunity to sell such weak stocks in the near future.
WITHDRAWAL OF MONETARY ACCOMMODATION BY RBI? Effective from May 6th, RBI has withdrawn conducting second Liquidity Adjustment Facility on a daily basis. It may be recalled that RBI introduced second LAF on a daily basis with effect from September 17, 2008 during the height of extremely tight liquidity conditions in India. In the last three weeks, inflation based on WPI has inched up from 0.18% to 0.70% for the week ended 25.4.09. Inflation based on CPI is still running high. It remains to be seen whether RBI will start rewinding its accommodative policies pursued aggressively by them since mid-September 2008. The RBI has got huge government borrowing in the next five months. The full-fledged budget is expected to be presented once the Lok Sabha is convened in the first week of June 2009.
High crude oil prices: The country may incur higher current account deficit and the concomitant rise in fiscal deficit due to higher crude oil bill, which accounts for more than 70 per cent of India’s import bill. Nymex crude oil price has reached a six-month high of USD 58.50 a barrel on last Friday. Higher crude oil price entails higher fiscal deficit for India.
Oil Marketing Companies: OMC stocks have shown resilience, due to subdued crude oil prices, to stock market crashes in the last six to eight months. However, with crude oil prices rising by almost 20 per cent in the last one month, these stocks are under pressure now.
Metal Stocks: As shown in Table 1, metal stocks have given a return of almost 100 per cent in several cases. This is driven by 15 to 30 per cent rise in base metal prices, like, copper, aluminium and nickel on LME in the last one or two months. In India, it is reported that steel sector is showing some signs of revival. The steel sector’s fortunes are dependent on world markets. Globally, there is an overcapacity as far as steel sector is concerned. China is the dominant consumer of steel in the world. If China’s economy shows any signs of early recovery, then steel sector may rebound. But, there are, at present, no clear-cut signs from China to this effect despite a massive economic stimulus package announced by the country.
Banking Stocks: Going forward, banking stocks in India may underperform in the next one year as the sector is facing challenges on the NPA front, depreciation in their G-Sec investment portfolio exacerbated by higher government borrowing, rich valuations, tepid growth in advances going forward, pressure on other income, overcaution on the part of banks to lend to certain sectors of the economy and less conducive atmosphere for further banking reforms.
Sectoral rotation: In the last six months or so, massive sectoral rotation has been taking place very frequently by several marketmen. The only beneficiaries of such a churning of portfolios will be stock brokers and professional traders.
Balance Sheet risks: Indian corporate performance may be weak due to certain balance sheet problems, like, huge forex losses, dilution of accounting standards, goodwill impairment for companies that have acquired global companies during stock market peaks, conversion of FCCBs into debt due to weak stock prices, higher debt levels, etc. The results of FY 2008-09 are still being announced and the process may continue till the end of June 2009.
OUTLOOK: In the next one or two weeks, Indian markets will be driven by the news flow related to national elections, IIP data that is being released next week, corporate results that are being announced and the perceptions of FIIs towards emerging markets. Domestically, there are more downside risks compared to upside. As such, it would be prudent to stay away from markets for the time being and wait till some clarity comes after the formation of national government and the presentation of the Union Budget 2009-10. As predicted by Deepak Parekh, HDFC Chairman, GOI may increase tax incidence for corporates during the current financial year.
Professor Nouriel Roubini and Nobel Laureate Paul Krugman are still skeptical of the current optimism that is exhibited by several economists. They still feel the world economy is not yet out of the woods. If one goes by the opinion of these two experts, the current optimism in the stock market may prove to be short-lived.
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