Experts: Fall a healthy sign of a mature bull market

Market analysts are divided over the current fall in stock prices. While some say it is a healthy sign of a mature bull market, others feel the Indian markets may have entered a corrective phase, which can last for one to two quarters.

As per definition, Indian stock markets are into a bear phase given that the Sensex, the bellwether equity index, is down 24 per cent down from its January-peak. Any downfall of 20 per cent or above is considered a bear phase.

"Twenty per cent corrections are also typical of a mature bull market. They help persuade central banks to provide cheap money that then fuels the equity market recovery," said Citigroup, in a recent note to clients.

"Falling stock prices, growing earnings risks and weak credit markets have led many to question our mature bull market thesis," the Citigroup analysts said, in a report on the US and other global markets.

Emerging markets and global materials stocks should be major beneficiaries of easy money, said the analysts.

Indian markets have seen a five-year long bull rally, which saw the Sensex rising from 3377.28 in December 31, 2002, to a peak of 20,873.33 points "" a compounded annual growth rate of 44 per cent for the last five years.

The bull run followed a four-year tech bubble-led bear phase from January 1, 1998, to December 31, 2002, which saw the index falling by 8 per cent during the four-year phase from 3,694.62 to 3377.28.

Indian markets have also seen similar correction in the five-year long bull phase. The Sensex fell from the peak of 12,612 on May 10, 2006, to 8929 on June 14 "" a decline of 30 per cent. During that phase, it took six months for the Sensex to go past the previous peak on October 13, 2006.

"We may witness 3-6 months of consolidation in our markets. We are going through a breather after the bull-run of last five years," said Vikas Khemani of Edelweiss Securities.

Typical of a bear phase is the flow of bad news into the market. This includes speculations of an early election, big write-off of farm loans, reported hedging losses by Larsen & Toubro in one of its overseas subsidiary and losses incurred by ICICI Bank in the sub-prime markets in the US.

"Investors increasingly fear that global equities have entered a secular bear phase "" surely negative news on earnings and credit markets will swamp any positive impact from lower rates and cheap valuations," wrote the Citigroup analysts.

Khemani points out that even though our equity markets may face a slowdown, there are no such fears on the economic growth.

"China also has seen such significant corrections many times in their Equity markets while their economic growth was on track during the last 15-120 years. In India too, we believe the economic growth cycle is still continuing," he said.