Broader market in bear territory

Broader market in bear territory

Mumbai: Indian equities inched closer towards a bear market as the benchmark 30-share Sensex lost another 183 points on Wednesday. The index is now down 16% from its 5 November peak of 20,852 points.

The broader market already seems to be in a bear phase. The BSE-500 index is down 20% since 5 November. The index accounts for 93% of the market capitalization on the Bombay Stock Exchange.

Stock market analysts traditionally consider a 10% fall in indices as a correction and a 20% fall as a full-blown bear market.

Widespread concerns about high inflation, earnings downgrades and corruption scandals have made India the worst performing market in the world this year after Egypt.

“With the broader market down 20%, we are already in a bearish phase," said Vetri Subramaniam, head of equities at Religare Asset Management Co. Ltd, which has total assets worth 10,780 crore.

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Technical indicators also point to a bear market.

Vinod Sharma, head of wealth management at the broking arm of HDFC Bank Ltd, pointed out that 434 stocks in the BSE-500 are trading below their 200-day moving average, which he said was a bearish technical indication. He also noted that the Sensex is still four percentage points away from entering a bear market.

Data from Capitaline shows that 141 stocks in the BSE-500 have been trading at 52-week lows and another 17 stocks at their lifetime lows in February.

The recent underperformance of the Indian equity market comes after a stellar outperformance in 2010, when the Sensex climbed 17%, the highest among the top 10 equity markets in the world.

“The market is in a bearish grip," said Apurva Shah, head of research at Prabhudas Lilladher Pvt. Ltd, a Mumbai-based brokerage. “High interest rates will surely slow economic growth next year. The corruption probes will slow decision-making in the government."

Still, some analysts say it is too early to call it a bear phase. “The sentiment is definitely bad because of concerns on regulatory actions and corruption investigations as well as macroeconomic problems," said Dhiraj Agarwal, director (India institutional equities) at the broking arm of Standard Chartered Bank.

Yet, Agarwal refused to term it a bear phase. “While we have not seen such a steep fall since 2009, in the past decade we have several corrections in which the market has fallen beyond 20%," he said.

Religare’s Subramaniam also said that too much need not be read into a 20% fall in an index.

“The term one uses is not of much significance and in the context of Indian markets, a 20-30% fall is not unusual," he said. Markets had fallen more than 20% in 2006 on similar concerns of high inflation and rising global commodity prices, but bounced back sharply subsequently, he pointed out.

The Sensex had fallen 28% in June 2006 to 9,062 from 12,612 a month earlier.

“As long as growth is in place, this fall would only be a temporary setback," said Agarwal.

India’s economic expansion may slow as interest rates climb, Robert Prior-Wandesforde, Singapore-based head of India and South-East Asia economics at Credit Suisse, wrote in a report on Wednesday. The pace of expansion may drop to 7.7% in the year ending 31 March 2012, from an estimated 8.4% this year, he said.

While most analysts and fund managers are already factoring in earnings downgrades in the next few quarters, most are still optimistic on the economic growth rate. Growth disappointment could be the next factor to hit market sentiment adversely, Prior-Wandesforde wrote in his note.

Although analysts differ in their assessment of a bear phase, there is a consensus that market sentiment would be weak for the next month or so.

Another 4-5% correction would place the markets at an attractive level and once clarity emerges on issues of governance, one could find more buyers stepping in, said Gaurang Shah, head of wealth management at Geojit BNP Paribas Financial Services Ltd.

Graphic by Yogesh Kumar/Mint

Bloomberg and Ashwin Ramarathinam of Mint contributed to this story.