If the history of bear phases in the domestic market is anything to go by, the recent rally in the benchmark stock indices after the United Progressive Alliance (UPA) government won the trust vote, does not signal the end of the bear market. Typically, such bear market rallies result in markets forming lower bottoms.
“The current bear market is not over. Sharp re-bounds are a common phenomena during bear phases,” said Garry Evans, equity strategist at HSBC.
Last week’s rally of over 1,500 points is yet another short-lived rally since the bear market began in January this year, according to HSBC Research. Chartists expect the Nifty to have an intermediate bottom at 3, 800. The index on Monday closed at 4, 332, marginally up by 0.47 per cent.
The last bear market in India was between 2000 and 2003. It was triggered by the internet bubble burst and lasted for a whopping 423 trading sessions. In comparison, the current bear market has been around for only 142 trading sessions.
Evans is of the view that market valuations have not declined enough, considering the interest rate levels, global credit crisis and the unstable oil prices. In two of the previous three bear markets, valuations had touched single-digit price to earnings (PE) multiples.
Anup Bhaskar, head of equity at UTI asset management company, however, has a different view. He says that any kind of bear phase these days is narrower in time but sharper in value.
“The current volatility is a result of global flows, which have been controlling the Indian markets. The percentage of foreign institution ownership is higher than it was earlier,” he said.
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The situation on the macro front in the country is much better than in the 1990s, when high interest rates, political instability and relatively small companies prolonged the bear phases.
“Even on Monday, interest rates are 50 per cent lower than what they were in 1997-98. Borrowing costs have not moved up significantly. Leverage is much lower and most companies are still sitting on cash. So, it will take less time for company earnings to recover from, than it took in the mid-90s,” said Bhaskar.