The past 12 months have seen the worst drop in the Indian stock markets. This, then, is obviously the wrong time to talk about the next bullish phase. So why are we doing it? The answer is simple. Most analysts feel that the current bear phase may be over by the end of 2009, or early 2010. Which is why you need to be in the right frame of mind to ride the coming bull wave. But are you sure that the upturn will follow the predictions of the experts? What if it starts earlier, say, by August this year? Or later, only in the second half of 2010?
Rise in the Sensex
Jan ‘91-Apr ‘92
Aug ‘93-Sep ‘94
Oct ‘98-Feb ‘00
May ‘03-Jan ‘04
So you have three options. One is to sit quietly with your decimated portfolio and pray for the good times to return quickly. Two, follow the oft-given advice these days. "If you believe the world doesn't end that often, and good companies don't disappear, I think it is actually a good time to invest," says Amitabh Chakraborty, president (equity), Religare Capital Markets.
What's the third choice? Read this cover package carefully. Historically, a mix of micro and macro indicators has influenced stock market movements. There may be no cause-and-effect link between these factors and the rise in the Sensex. But there's a lag effect: the indicators move positively before stocks begin their northward movement. If you, as an investor, track these parameters closely, you may be in an almost perfect position to spot the next boom before others get to know of it.
Money Today presents 10 'hope' indicators to know when the current bear phase will end. Our only submission is not to be swayed by one or two indicators. Ideally, all of them, or at least a majority of them, should be pointing in the same direction. Since this recession is unique, you may not hit the bull's eye with our analysis. But you will definitely be close to the mark.
|New governments and their impact on the Sensex|
|6 months||1 year|
|21 June 1991 (P.V. Narasimha Rao)||37.57||126.28|
|31 October 1984 (Rajiv Gandhi)||44.49||77.8|
|22 May 2004 (Manmohan Singh)||16.41||27.65|
|14 January 1980 (Indira Gandhi)||3.01||20.4|
|1 June 1996 (H.D. Deve Gowda)||-26.08||NA|
|21 April 1997 (I.K. Gujral)||-0.35||NA|
|19 March 1998 (A.B. Vajpayee)||-19.11||-3.88|
|Figures are the percentage change in the Sensex after the swearing in of the new government;|
Market data: Capitaline
Since 1980, each time that a seemingly stable government has come to power, the Sensex has invariably zoomed within the first 12 months. In some cases, the gains have been spectacular: as high as over 125%, as was the case in 1991, when the Congress came to power. Even when the late Rajiv Gandhi assumed office in 1984 with a huge majority, the BSE index rose by 45% within six months, and by nearly 80% in a year’s time. Maybe it’s just the ‘Congress’ effect because the Sensex rose again in 1980 (late Indira Gandhi assumed office) and 2004 (Manmohan Singhled UPA came to power).
Obviously, when investors felt that a weak coalition was in control of the economy, as was the case with V.P. Singh in 1989, and the Deve Gowda-led United Front government in 1996, they gave the stock markets a thumbs down. The only exception in the past three decades has been in 1998 when the NDA took charge and completed its full term.
The Sensex moved down during the 1998-2004 phase, but this may have been caused by a series of negatives such as the international sanctions after the nuclear tests at Pokhran (1998), the Kargil war (1999), and the bursting of the dotcom bubble (2000).Clearly, the markets are energised by a government that is more likely to last for a five-year tenure.
However, the markets do react to mid-term policy decisions. For instance in May 2004, when investors realised that the UPA was unlikely to privatise the PSUs, they pushed the Sensex down by 11.1% over the weekend (14-17 May). Similarly, when the annual budgets have been growth-oriented, as was the case in 1992 (Manmohan Singh was the FM) and 1997 (P. Chidambaram delivered the ‘dream’ budget), stock prices shot up smartly.
With elections less than two months away (April-May 2009), it is time for the investors to figure out the stability of the new government. If a strong Congress-led coalition wins, the Sensex may go up again. The BJP-led NDA may also have the same effect. In the end, it will depend on the impact the policymakers have on the GDP growth.
A consistent GDP growth of over 6% and a rising index of industrial production (IIP), coupled with the expectations of their sustainability in the near future, are likely to push up the stock markets. Explains Saurabh Mukherjea, head of Indian equities, Noble: “The recovery in stock prices is not expected until there is a pick-up in the annual GDP growth rates. If we look across 10-, 15-and 20-year time scales, we find that the markets fail to recover as long as the GDP growth stays below the 6% mark.” So, in case we witness around 6% growth during this fiscal, as has been predicted by leading Indian and foreign analysts, this parameter may become a crucial one in influencing the timing of the next boom.
|Why GDP and IIP matter|
|Two years of rising GDP and IIP, especially a GDP growth of more than 6%, left its impact on the bourses in 2003-4 when the Sensex gained 81% after two years of losses.|
|Year||GDP growth||IIP growth||Sensex returns|
|All figures in %; Sources: RBI, CSO and Capitaline|
In the recent past, the IIP figure dipped by 2% in December 2008, which was the largest contraction since February 1993, and the second time in the October-December period. Predicts Robert Prior-Wandesforde, senior Asian economist, HSBC: “Looking ahead, we can expect at least another couple of months of industrial contraction, with the overall GDP growth also set to soften further in the first half of 2009, eventually falling below 6%.” He, however, feels that the second half of this year is likely to be better, when factors such as fiscal easing, dropping of commodity prices, additional oil and gas output and regional trade recovery, among others, begin to impact the Indian economy positively.
According to Rohini Malkani, economist, Citi India, “Given the coming general elections, the government will be coming out with an interim budget, instead of a regular one. One can safely say that the poor economic data will be used as a reason for additional spending or tax cuts.” Therefore, the policies of the new government will be crucial for the IIP and GDP turnaround. This can happen only if we have a stable government that comes to power and lasts for at least four years.
In some cases, the economic growth can take place despite inaction on the part of the government. For example, good monsoons and high agricultural productivity have the ability to add several percentage points to the GDP growth rates. In fact, India has mostly seen higher growth only when agriculture too has done well. Similarly, once the contribution from the services sector grows, as it has done in the past, the dependence on manufacturing and agriculture will reduce further. This will aid growth since the services sector is likely to expand in a new consumerist India.
But even if there’s a resurgence in macro indicators such as IIP and GDP, the investors will have to analyse the data for India Inc’s quarterly results before making up their minds to invest additional amounts in the country’s stock market.
Past data suggests that unless 70% of the companies in the BSE 500 universe deliver positive growth in net profits for six to eight quarters, market sentiments remain depressed and bearish. More importantly, since the 30 Sensex stocks comprise nearly half of the BSE’s overall market capitalisation, the earnings growth of these large caps has to be in double digits over several quarters for a sustained bull run. Obviously, the expectations for the next couple of fiscals need to be encouraging. For a long-term investor, this implies that the country’s GDP will have to continue to grow at a frenetic pace for at least two-three years, and that the growth has to be more secular in nature.
This is what happened in the previous bull period (2003-7). Almost every company posted positive quarterly results. Analysts were gung-ho about high double-digit earnings growth over the next six-eight quarters. Despite the markets discounting future earnings, Indian PEs still looked attractive for a long time, especially when they were compared with those in other emerging markets. It was only in 2007, when the Sensex rose sharply from 13,942 to 20,286, a growth of 45%, that there were murmurs about a bubble in the making in the Indian markets. Anyway, the global recession pricked it.
Today, the expectations are optimistic for 2009-10. Three sectors—auto, pharma and petrochemicals—which are expected to show a negative growth in net profits in 2008-9, may show positive rates in the next fiscal. Several other sectors, such as construction and consumer goods, will maintain high growth rates in 2009-10. This, say experts, will almost double the combined PAT of the Sensex stocks from 3.9% in 2008-9 to 7.5% in the next year.
Therefore, it seems that investors should track the quarterly results from the third quarter of 2009-10. These results will tell them which stocks are likely to show an upsurge and also whether the current bearish period is about to end. If, as we said earlier, a higher percentage of the BSE 500 universe shows exceptional growth rates, it will hint at the beginning of the next boom. However, optimistic investors will want to compare indications from the quarterly data with what is really happening in the capital goods sector.