The Smart Investor Roundtable '99, held on 18 December 1998, correctly predicted the "End of (the) Bear Phase in 1999", as it was titled, and the big move in cyclicals that would accompany the impending bull run. The participants then correctly read the signs of an incipient economic recovery which they expected would trigger a bull phase after four years of depression in the stockmarkets.
Of course, nobody could predict then that the BJP-led coalition government would collapse within the next three-four months and again plunge the country into acute political uncertainty. As if that were not enough, before elections could be held, the country got sucked into a border war with Pakistan. But even this failed to reverse the strong bull run that the market witnessed since April 1999.
Which goes to prove that ultimately what matters most to markets is economic and hence corporate fundamentals. Political events more often than not just offer excuses to justify bearish or bullish actions, they are not the fundamental drivers of cyclical turns. The key word is "cyclical". Politics after all is important because it affects the pace of economic reforms and the quality of policy making, but in a structural sense.
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Hence, the quality of governance determines the overall price-earnings rating of the market and especially of economy and government related stocks. And there can be no doubt that the Indian market underwent a substantial PE derating since 1992 when economic reforms were first initiated under a more stable political order. But politics cannot adequately explain shorter term, cyclical turns in the PE levels, which are quite sharp, driven as these are by shorter term earnings outlook.
Remarkably, the bull run of 1999 began in late April soon after the fall of the previous Vajpayee government by a single vote and the failure of the opposition to form an alternative government ie at the peak of political uncertainty. Interestingly, it was triggered by foreign investors rather than local operators who were reeling under political shock. This was for the first time since foreigners entered the stockmarkets in 1992 that the operators were caught on the wrong foot. The BSE Sensex zoomed from a low of 3183 points on April 28 to a high of 4197.08 points on May 20, 1999 before the Kargil war brought in a correction.
But even at the peak of the