Mumbai: The exhilarating bounce from the lows that the Indian equity market touched on 9 March 2009 is now a year old—and what a year it has been.
These 12 months have been a wildly profitable time for those brave souls who held their nerve and bought stocks, while it has been a missed opportunity for those who thought it was a short-lived bear market rally and thus preferred to sit on cash.
The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, closed on Tuesday at 17,052.54, up 109% over a year ago, though just about nobody believes the next 12 months will be as good.
Also See A Year Long Rally (Graphics)
India’s most widely watched market gauge survived four corrections to rise the fastest among world indices, barring Sri Lanka and Vietnam. While valuations are above the long-term average, the outlook seems bright to investors such as Mark Mobius, who helps manage $34 billion (Rs1.55 trillion) at Templeton Asset Management Ltd and says that Indian stocks could gain the fastest in the world.
Metals, auto, banks and consumer durable stocks led the year-long rally while power, oil and gas, and household and personal product stocks were relative laggards.
Much has changed since last March. If the main source of global fears a year ago was weak banks, the big worry now is sovereign risk. Investors in mid-2009 were looking for signs of a consumption revival, while analysts believe the next push to stock indices will come from an investment revival. Collapsing growth rates cast a shadow in March 2009; resurgent inflation is now the big economic risk.
A year ago, stocks were still falling after losing some 52% in the previous year. The future looked bleak. Even towards the end of March 2009, when the Sensex had gained 4% from its lows, few were confident enough to call it a rebound. One brokerage wrote a note arguing why it disagreed with the case for an Indian bull rally. Another advised clients to sell into the rally as it was all about “misplaced optimism”, while a third wrote that weak growth was likely to ensure that the Sensex didn’t rise in the first half of 2009.
“Turning points are not predictable, everything is clear only in hindsight,” said Chetan Parikh, head of wealth management firm Jeetay Investments Pvt. Ltd. “A lot of people were waiting for the market to fall further.”
Cash levels in equity mutual funds peaked in February and March, when month-end data showed an average 18% and 15%, respectively. Some funds even had cash of over 50%. Investors came flocking back into emerging markets as they recovered amid recessions elsewhere. By April, the Sensex had risen some 38% from its low and Indian firms sought fresh equity funds.
Indian firms—especially overleveraged realty firms— started to sell shares to institutions through qualified institutional placements. Unitech Ltd and Indiabulls Real Estate Ltd were among the first. By the end of 2009 some Rs50,000 crore was mopped up, adding to confidence levels.
With the United Progressive Alliance’s May election victory raising hopes of economic reforms, domestic mutual funds joined the party. This was interrupted by a correction in July as the markets shed 10%, disconcerted by a budgeted fiscal deficit of 6.8% of gross domestic product and the lack of a reforms push. Then, as earnings beat expectations and amid abundant global liquidity, the rally resumed; by the end of July, the Sensex was at a 13-month high.
While an impending drought in India and fears of tightening in China held global markets on a tight leash, by September the Sensex had doubled, in what was the fastest such surge since the early 1990s when economic liberalization and speculator Harshad Mehta boosted it to dizzy heights.
By this time, company earnings had started to surge, the government. Official economic growth estimates were revised upwards. But inflation started to accelerate. This, and fears that Dubai would default on its debt payments, led to a third correction in November. Yet, foreign investors ended the year with net investments of $17.6 billion.
There was another correction triggered by fears of a debt crisis in Greece in 2010. The markets bounced back, boosted by government plans to cut the fiscal deficit that were announced in the Union Budget on 26 February.
Yet, the next 12 months are unlikely to be as good as the last 12, fund managers said.
“The external environment will have a greater role to play this year and returns won’t be as robust,” said a pension fund manager from Singapore, who didn’t want to be identified.
Graphics by Paras Jain/Mint
Ashwin Ramarathinam contributed to this story.