Last month, even as nationwide polls began to choose the country's next government amidst increasing uncertainty over the outcome of the whole process, bulls extended the rally beyond street expectations. In fact, the market zoomed by 17.4%, recording the highest monthly gain in ten years and ignoring all negative news flow including the outbreak of "swine flu" that threatened to grow into a pandemic and the forthcoming stress test results on US banks. The benchmark index has broken out of its range of 8,000-11,000 and gained nearly 50% so far. Despite our forecast last month that the market carried the potential to surprise on the upside, we stand pleasantly surprised by the market's recent performance.
MARKET OUTLOOK
Time for a breather
- Soaked in abundant liquidity, the real economy has shown sprouts of "green shoots" in terms of distinct signs of improvement in lead indicators and business confidence globally. The credit markets have calmed down with the interest spreads cooling off to the pre-Lehman Brothers fiasco levels and the equity markets have rallied beyond street expectations.
- India too has had her fair share of positive developments. Some of the lead indicators, like the continued buoyancy in cement dispatches, revival in automobile sales and resilience in telecommunications (telecom) subscriber additions, have positively surprised the markets. However, some of the other indicators, like the Index of Industrial Production (IIP) and exports, remain weak and a conclusive recovery could still be a few months (if not a couple of quarters) away.
- In terms of valuations, after the recent steep run-up, the Sensex' multiples have reversed to the historical mean average of 14.5-15.0x one-year forward earnings. This essentially means that the better part of the multiple expansion phase is over and the next up wave would require support from earnings upgrades. The earnings upgrades will, however, depend on the sustainability of the economic revival.
- Moreover, the rally has been too fast and the market seems to have digested most of the good news in terms of the signs of economic revival and a better than expected recovery in CY2010. Consequently, the one-sided upmove appears to be nearing its end and in the days ahead the markets are likely to turn volatile, if not undergo a sharp correction as is awaited by most market participants who have remained under invested and missed the better part of the rally.
- For investors, the near-term volatility and the possible negative bias would be an ideal time to accumulate quality stocks. Especially in the mid-cap space where there still exists a lot of scope to explore value even at the current levels. Moreover, the recent strong rally in the markets globally has highlighted the fact that timing the markets is a futile exercise for those investors that have a reasonably long investment time horizon
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