Year-end rally or is there more to it?
The benchmark indices have finally broken out of the multi-week range. What‘s more, the broader market is outperforming the benchmark indices with a smart rally in the mid-cap index and stocks.
The benchmark indices have finally broken out of the multi-week range. What’s more, the broader market is outperforming the benchmark indices with a smart rally in the mid-cap index and stocks. Clearly, the year-end rally has commenced and the momentum has picked up. We are not surprised, nor should our readers be. After all, the market has acted as per our expectations- if you recall, in our latest Market Outlook report we had observed that the existing conditions looked conducive to a year-end rally and that the mid-caps might outperform the market. Well, the broad market, as indicated by the Sensex, rose by 4.5% whereas the BSE Mid-cap Index surged by 5.1% in the last month, thereby vindicating our stance.
The rally is supported by two key domestic factors: first, the government’s assertiveness to follow up on reforms and policy decisions announced in October this year; second, a shot in the arm from global rating agencies with the recent comments mitigating the concerns related to downgrade of India’s rating.
After announcing a string of reforms in October the government has followed it up with more action. It has already managed to get the hike in foreign direct investment in retail approved by the Lok Sabha and the Rajya Sabha. It also aims to table some important bills in this session, like the insurance and pension fund bills. The cabinet is set to approve the setting up of a National Investment Board to advise ministries on mega projects.
Another boost has come from the rating agencies. Moody’s recently said that India’s outlook remains stable. A possible downgrade of India’s credit rating was one of the main concerns of the market but that too has been allayed up to an extent now. Some other research houses and rating agencies too have had positive things to say about India recently. Standard and Poor’s, for example, has admitted that India’s outlook has improved slightly in the wake of the series of reforms initiated by the government.
Globally, there is optimism that the world’s biggest economies are responding to the stimulus measures unleashed by their respective central banks. Equities, commodities, bonds and the dollar have all risen in the past month on the successful conclusion of the Greek bail-out talks and the possibility of a deal in the USA to avoid a fiscal cliff. China’s economy too is recovering gradually. For the first time since October 2011 HSBC’s China Manufacturing Purchasing Manager’s Index crossed the 50-point line rising to 50.5 in November from 49.5 in October this year.
Though things have improved, all is still not well. Globally, the issues are structural in nature and there cannot be any quick fix solution to the same. In India, the macro-economic conditions are still precarious. Inflation is likely to remain at alleviated levels and there are signs of a slowdown in consumption with the investment cycle yet to pick up. The latest gross domestic product reading of 5.3% for Q2FY2013 reflects the situation on ground. Thus, it is difficult to confidently conclude whether the on-going rally is just a year-end multi-month corrective upmove in the market or the start of a new bull run. Time will only tell. However, the learning from the ongoing multi-month rally is that the investors need to stay tuned to equities rather than simply shunning them, as even in a corrective or consolidation phase the market does provide enough money-making opportunities.
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