The Sensex has gained 35% in the powerful rally that began from the closing low of 8,160 reached on 9 March. With institutions such as the International Monetary Fund warning of a long, slow and sluggish recovery ahead, most market observers believe that this sharp pullback is a bear market rally—a temporary advance in prices in a market that’s still downbeat. So how does the rally compare with other major bear market rallies?
Well, we had a sharp recovery in the markets in October-November last year, with the Sensex rising from a closing low of 8,509 on 27 October to a high of 10,631 on 4 November, a 25% rise in a mere five trading sessions. And before that there was the rally between 16 July and 11 August, which saw the Sensex rising by 23%.
Also See Sharp Pullbacks (Graphic)
The bear market that followed the dotcom bust also saw several sharp rallies that ultimately fizzled out. For instance, take the rally that began on 21 September 2001, after the market had plumbed new depths following the attacks on the World Trade Center. That pullback took the Sensex up from 2,600 to 3,442 on 10 December, a rise of 32%. A year later, another rally between the end of October and end-December 2002 saw the Sensex rise by 20%. So the current rally is certainly the strongest in recent memory.
Another way of looking at the rally is in terms of valuations. The current rally has seen the Sensex price-earnings (P-E) multiple rise from 11.6 on 9 March to 15.3 (this is the trailing, not the forward, P-E). During the rally late last year, the Sensex P-E rose from 10.36 to 13.1. During the July-August rally last year, of course, P-Es were much higher. Valuations during the dotcom bust bear market rallies were not too different from the current one. For instance, during the September-December 2001 rally, the Sensex P-E rose from 13.54 to 16.02. And during the October-December 2002 pullback, the Sensex P-E went up from 12.26 to 14.73. In terms of valuations, the current pullback has already reached the top of the range for a bear market rally.
A Citigroup Inc. report points out that India’s bear markets have historically lasted 30 months on average, been longer than regional markets (21-23 months) and longer than India’s bull markets (bar the last). Is this bounce the beginning of a bull run? We think not, given India’s equity market lows are shallower, longer, and more in sync with its economic cycle. The market is more likely to crawl rather than spike out of its current trading band.
Maybe so, and it is undeniable there are powerful headwinds ahead, but everything depends on the return of risk appetite. Decent results by banks in the US are encouraging, as is the resumption of foreign inflows.
More importantly, money is flowing out of the developed markets into emerging markets. As global fund tracker EPFR.com reports, year to date all emerging market equity funds have received inflows of $7.3 billion (Rs36,281 crore) while all the developed country equity funds have sustained outflows of $56.1 billion. With governments cranking up the money printing presses, that momentum could drive emerging markets higher, in spite of the long road ahead to economic recovery.
Graphics by Ahmed Raza Khan / Mint
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