This is the third bear-market rally in the Indian bourses in five months. By returns, it ranks the lowest, with the Nifty index on the National Stock Exchange rising by 14% from its close on 9 March.
In the volatile markets of late October and early November last year, the Nifty had risen by 24.5% between 27 October and 4 November. Between mid-November and mid-December, it rose by about 20.5%.
That notwithstanding, there are signs that global risk appetite is improving. The Indian markets have merely followed the trend in the rest of the world, where equities were back in the reckoning after a number of large banks reported their banking operations were profitable in the first two months of the current year.
Add to that the US government’s statement on late Sunday about plans to rid banks of between $500 billion (Rs25.25 trillion) and $1 trillion worth of toxic assets, an announcement that expectedly sent global markets soaring. But the key takeaway, according to a fund manager with a domestic mutual fund, is that these developments would significantly alter the trend in fund flows of foreign institutional investors (FIIs).
Also See Valuations Still High (Graphic)
It’s interesting to note that the selling seems to have abated. In fact, FIIs have started reporting net purchases since 12 March, the day the rebound began. In the cash segment, they have made purchases of Rs1,095 crore since 12 March, but more importantly, they took net long positions worth Rs2,974 crore in the futures market. Contrast this with net short positions worth Rs2,342 crore in the first six trading sessions of March in both the segments. The tide seems to have turned.
The sudden rally also seems to have caught short-sellers unawares. The resultant short-covering is adding fuel to the rally. Traders also point to the fiscal year-end factor, where fund mangers try and prop up net asset values by making large purchases. According to one trader, insurance firms are deploying allocated funds before the close of the fiscal year.
Will this rally be sustained? Much depends on FII flows. Recent developments suggest that risk appetite is returning and selling would abate. But there are a couple of caveats. First, global growth estimates are being revised downwards. Two, even if global risk appetite improves, there is the uncertainty of elections in India.
As for the Asia markets except Japan, as Citigroup Inc. strategist Markus Rosgen, points out: “No one knows if this is a bear or a new bull market, but note that: 1) Markets did not reach the valuation lows of 0.9x P/BV (price to book value) seen in the 1975 or 1982 recessions, 2) central banks are implementing QE (quantitative easing), and 3) Keynes is back in policy circles. Ask yourself, either the world is not ending, in which case QE and Keynes are not needed, or is the situation bad enough to warrant both, in which case 0.9x P/BV is where valuations would likely go.”
Graphics by Ahmed Raza Khan / Mint
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