India's Stock Market in a Bear Market Rally?

 

On March 26 2009 Sensex rose to a 2 month high crossing the 10,000 mark on easing inflation and U.S. market rally.

In spite of some stabilization from 2008 trends, Sensex had fallen 12.65% in 2009 as of mid-March as risk aversion and FII outflows continue. Top10 firms lost over $4 bn from their market capitalization in Feb 2009. Stock market fell over 56% in 2008 from the Jan-08 peak making it one of the worst performing markets among Asia, BRICs and EMs

Stock market will face further risks in 2009 as investor sentiment will continue to trend down amid significant slowdown in GDP growth, domestic demand, lower corporate earnings, political uncertainty, increasing terrorist activities, sharp depreciation of Indian rupee and expected future weakness against USD, and lower dividends forecast for 2009 (on global liquidity crunch, contracting industrial activity though easing commodity prices related cost of production is a plus). Slowing IPOs, capital raising activity by firms is affecting their expansion plans. This will weigh down on investment in 2009 and further flight out of foreign capital from Indian markets

FIIs have sold over $1.8 bn in 2009 as of mid-March and $13 bn in 2008 (after buying $17 bn investment in 2007) and their share in BSE-500 Companies (which a/c for a large share in market cap) has also declined; this is causing rupee depreciation, depletion of forex reserves

Valuations have shown significant correction as P/E ratios are down from a high of 28 in early 2008 to ~9 in early Feb 2009, and are also cheap in terms of  bond/equity yield gap, market cap/GDP relative. But given that corporate earnings will ease further and risks to the corporate sector are to the downside in 2009 on demand slowdown and credit crunch, valuations might fall further making an attractive buying opportunity by end-2009 or early-2010

Q4 2008: Profits for top line of 595 companies grew 17% from 35% in Q3 2008. The bottom line saw net profit fall 21.1% on lower realization for commodities, marked-to-market losses on derivatives exposures and high finance charge

Energy stocks (losses of oil companies), real estate (slowing capital inflows, housing correction), auto (slowing demand), banking (defaults), tech (slowing IT exports), cement, metals, finance along with retail investors have taken a hit

Again, what others are saying have also been quoted. They are as follows:

Stock market regulator: FIIs are lending and borrowing overseas by using offshore derivatives (P-notes) to short sell in the market

UBS : India's benchmark stock index would rise though FY2009/10 due to relative cheap price in March 2009 compare to other markets; Index will increases  as extending a bull market in anticipation of of a recovery in earnings

HSBC :Cheaper valuation, government stimulus plans as well as government pumps about US$ 100billion would rebound stock market; rupee's depreciation again U.S. dollar in 2008 would make overseas investors to attract India's stock market in 2009

Kotak (via bloomberg): Market was already expected the rate cut, the fear now is that govt are running out of measures that they can use to stimulate economy

Fundsupermart: still cautious on India as earnings might slow down further and market is still expensive compared to other Asian markets

Goldman Sachs : Further fall in markets, FII holdings expected as less favorable macro outlook and corporate earnings don't support the high equity valuations