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India Equity Research Reports, IPO and Stock News
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Key debate: Narrow indices are past their 200DMA for
the first time since February 2011. Sector rotation has hit
a 15-month high. Cyclicals are back and the so-called
defensives have underperformed. These are tell-tale
signs of a new bull market. Is this a case of the market
telling us where the fundamentals are heading or is this
a head fake? Simply put, are we in a new bull market?
First, our view
New bull markets are started by favorable liquidity
conditions and attractive valuations. At the end of
December, both ingredients fell into place. Bull markets
make progress as fundamentals improve. Fundamentals
can come in various forms such as technology changes
and favorable demographics, but ultimately all these
changes imply upward revision in growth forecasts. Not
surprisingly, fundamentals remain fuzzy. The market
continues to have support from skeptical positioning and
low expectations. We expect upward progress, although
the pace of the recent move may induce volatility.
Now, the facts
If this is indeed a new bull market, the preceding bear
market at 60 weeks and -26% return will prove to be the
shortest and shallowest in 20 years – a far cry from the
average 50% fall seen in previous bear markets.
Valuations are around 30% higher than what they were
at the end of the previous three bear markets. This could
create doubts about this being the start of a new bull
market.
The jury is out, but bears will be tested
What do we need to be sure that this sustains as a new
bull market? The key difference between the 2003-08
period and now is that global growth is no longer
supportive. To that extent, it needs an extra policy push
to pull India’s growth rate back to trend. Corporates are
suffering from poor profitability – inflation needs to
remain moderate for that to improve. That will also help
rates to fall. The key risks remain Europe and oil. India
needs time to adjust its macro to absorb risks from
Europe and oil. If these risks do not unfold in say the
coming six months, the second half of 2012 may prove
to be even stronger for equities. None of these are
differentiated insights, but the good news is very few
believe these events will happen, and markets
sometimes favor climbing walls of worries
The rise in indices tends to be
different across bull markets.
• The P/E ratio invariably rises
significantly and accounts for a large
part of the return. This is a reflection
of the market’s optimism on growth
outlook. The starting point for P/Es
now is higher than it was in the
previous three bull market starts.
• The broader market outperforms the
narrow market.
• New bull markets start with very
strong rallies in the first few weeks,
which look quite similar to the rallies
of the previous bear markets. It is no
different this time, except that this is
the strongest first-month move ever.
At 11%, it is more than twice the
average 5% move in the first month
of the previous bull markets.
• Each bull market of the past has
created new highs in average daily
trading.
• The average decline in the narrow
index is around 50% from peak to
trough. The most recent bear market
produced only a 26% fall.
• The P/E ratio tends to drop by twothirds
from the peak. The starting
P/E has been quite similar at 30
times or more. This time the starting
P/E was lower and the ending P/E
appears to be higher.
• The broader market underperforms
the narrow market.
• Volatility of returns is not necessarily
different from bull markets. The
duration of bear markets is also not
very different from bull markets but it
is hard to point out any consistency
in this regard.
• Bear market rallies tend to be
powerful.
• It takes a long time to get back to
previous bull market peaks. In the
last bull market, we failed to cross
the peak of the prior bull market.
This assumes that the rally that
started in March-09 was a new bull
market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key debate: Narrow indices are past their 200DMA for
the first time since February 2011. Sector rotation has hit
a 15-month high. Cyclicals are back and the so-called
defensives have underperformed. These are tell-tale
signs of a new bull market. Is this a case of the market
telling us where the fundamentals are heading or is this
a head fake? Simply put, are we in a new bull market?
First, our view
New bull markets are started by favorable liquidity
conditions and attractive valuations. At the end of
December, both ingredients fell into place. Bull markets
make progress as fundamentals improve. Fundamentals
can come in various forms such as technology changes
and favorable demographics, but ultimately all these
changes imply upward revision in growth forecasts. Not
surprisingly, fundamentals remain fuzzy. The market
continues to have support from skeptical positioning and
low expectations. We expect upward progress, although
the pace of the recent move may induce volatility.
Now, the facts
If this is indeed a new bull market, the preceding bear
market at 60 weeks and -26% return will prove to be the
shortest and shallowest in 20 years – a far cry from the
average 50% fall seen in previous bear markets.
Valuations are around 30% higher than what they were
at the end of the previous three bear markets. This could
create doubts about this being the start of a new bull
market.
The jury is out, but bears will be tested
What do we need to be sure that this sustains as a new
bull market? The key difference between the 2003-08
period and now is that global growth is no longer
supportive. To that extent, it needs an extra policy push
to pull India’s growth rate back to trend. Corporates are
suffering from poor profitability – inflation needs to
remain moderate for that to improve. That will also help
rates to fall. The key risks remain Europe and oil. India
needs time to adjust its macro to absorb risks from
Europe and oil. If these risks do not unfold in say the
coming six months, the second half of 2012 may prove
to be even stronger for equities. None of these are
differentiated insights, but the good news is very few
believe these events will happen, and markets
sometimes favor climbing walls of worries
The rise in indices tends to be
different across bull markets.
• The P/E ratio invariably rises
significantly and accounts for a large
part of the return. This is a reflection
of the market’s optimism on growth
outlook. The starting point for P/Es
now is higher than it was in the
previous three bull market starts.
• The broader market outperforms the
narrow market.
• New bull markets start with very
strong rallies in the first few weeks,
which look quite similar to the rallies
of the previous bear markets. It is no
different this time, except that this is
the strongest first-month move ever.
At 11%, it is more than twice the
average 5% move in the first month
of the previous bull markets.
• Each bull market of the past has
created new highs in average daily
trading.
• The average decline in the narrow
index is around 50% from peak to
trough. The most recent bear market
produced only a 26% fall.
• The P/E ratio tends to drop by twothirds
from the peak. The starting
P/E has been quite similar at 30
times or more. This time the starting
P/E was lower and the ending P/E
appears to be higher.
• The broader market underperforms
the narrow market.
• Volatility of returns is not necessarily
different from bull markets. The
duration of bear markets is also not
very different from bull markets but it
is hard to point out any consistency
in this regard.
• Bear market rallies tend to be
powerful.
• It takes a long time to get back to
previous bull market peaks. In the
last bull market, we failed to cross
the peak of the prior bull market.
This assumes that the rally that
started in March-09 was a new bull
market.
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