Indian market analysis: We are not in a secular bull market as yet

Oct 21 2013, 14:00 IST
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If indices are near high, blame it on their composition. (Illustration: Shyam) If indices are near high, blame it on their composition. (Illustration: Shyam)
SummaryIf Indian market indices like BSE Sensex, NSE Nifty are near highs, blame it on their composition.

The Indian stock market appears to be within striking distance of hitting all time highs on a closing basis, a milestone which has been evading us for almost five years. We are now a little less than 300 points away from the high NSE Nifty had hit on Jan 8, 2008. The BSE Sensex needs another 600 odd points before it can capture its high of 21,108 hit in November 2010.

As we enter into the festive season, there may not be any spectacular fireworks in store; yet, the market seems to be in a mood to celebrate this time. What is strange is that though levels and new highs are often discussed widely, the retail investor or for that matter even the institutional investors are not really sanguine about allocating more money into equities.

So why is the market not correcting sharply as many people expect or hope? The recent rally has in fact confused everyone. It’s raining downgrades from rating agencies to IMF and now even the World Bank has downgraded India’s growth. Our research has found that most key economic parameters in FY14 are expected to be the weakest in the past decade or longer. Corporate earnings growth in FY14 is expected to decline to previous lows witnessed in FY02 and FY09. The risk remains on the downside of further cuts in GDP, industrial and earnings growth estimates. FII and DII flows are likely to remain flat to negative at the margin. All this bad news may not be in the price as yet. The Nifty currently trades at 1 standard deviation below its long-term average, but has traded much lower in FY02 and FY09. Meanwhile, the honourable finance minister appears very confident of India’s growth and has more or less dismissed most negative reports as undue pessimism.

What is happening at present is that the market is suffering from a bipolar disorder. There are some stocks that are trading close to all-time highs and there are many stocks that are trading at all-time lows. The entire composition of the market has changed significantly. In the last five years, the Sensex composition has changed; the cyclical stocks have lost weight while the defensives gained an upper hand. This perhaps explains why the market is where it is from an index point of view.

For example, five years ago, the IT and

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