Financial services firm Morgan Stanley India, which was deeply pessimistic about the Indian market during the last bull run, has turned more optimistic.
In a research note dated 10 July, it asks whether India is already in a new bull market.
It points out that a characteristic of a new bull market is a change of leadership among sectors, with the sectors that led the last rally falling by the wayside. In the rally since March, though, the sectors that led the earlier rally, such as capital goods, realty and banks, continue to lead. The note argues that it is quite possible that sector leadership changes as this becomes a full-fledged bull market.
There are several special features of the last bear market, if we assume that a new bull market started from 7 March. One is that the 2008-09 bear market lasted for just 60 weeks, compared with 84 weeks in 2000-01 and 116 weeks in 1994-96.
Leadership matters: The Bombay Stock Exchange building. Madhu Kapparath / Mint
The second is that the correction this time was sharper, with the benchmark Sensex index falling 62%, compared with 57% during the dot-com bust and 41% during the 1994-96 bear market.
On the positive side, the scope for a bounce back is higher because the note says the past price-earnings (P-E) multiple at the bottom of the bear market this time being a low 9.7, compared with 12.3 in 2000-01 and 13.1 in 1994-96. The past 12-month growth in earnings per share was higher this time at 11%, compared with 8% in 2000-01 and 9% in 1994-96. The lower P-E and higher earnings growth is explained by the larger outflow of capital by foreign institutional investors this time.
There is another difference. The note says the 10-year treasury yield at the trough of the latest bear market was 5%, while this yield was 9% during the trough of the dot-com bust. Trouble is, the yield kept on falling after the dot-com bust, reaching 5.1% in October 2003, even after the bull run started. This time, though, the 10-year yield is around 7%.
Finally, the note points out that it takes a long time to get back to previous bull market peak. The average time taken in the past three bear markets has been 45 months, it says.
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