The Year of Sensex Bulls

Despite the economy’s troubles, the Sensex has gone up by a handsome 25 per cent over 2012
EQUITY BOOM
WHO PAYS THE PIPER? The Bombay Stock Exchange appears out of tune with the state of the economy

An uncertain economic environment is among the many legacies of the Great Recession that has afflicted much of the world. Sub-par growth in some countries—and contraction in others—is part of its global fallout. Being no exception, India’s rate of expansion slumped to 6.5 per cent in 2011-12, and the resultant despondency over India’s growth story was an explanation for the shoddy treatment stockmarkets (like elsewhere) meted out to equity investors. The BSE Sensex ended 2011 at 15,454, a 25 per cent loss of investor wealth over the year. And with India’s slowdown set to worsen in 2012-13 (and worsen it did), expectations of equity performance were understandably low for 2012. Yet, despite the economy’s troubles, the Sensex has gone up by a handsome 25 per cent over the past year. This is a paradox, is it not?

“Not really,” says an equity analyst, “It was largely driven by sentiment, which was boosted by a slew of reformative steps that the Government dared to take”.

Still, this sentiment theory sounds a bit unconvincing. Did the investors who suffered in 2011 suddenly regain their confidence? Or did stocks attract others who dared look past the grim economic reality? A mix of both, it would appear. But those with the most to celebrate are the latter, the market’s contrarians who judged that the Sensex had bottomed out at 15,454 (India’s fundamentals wouldn’t have let it slip below 15,000, they bet), and then bet on a recovery ahead. Several Sensex shares, trading at price-earning multiples in the low teens, were seen as bargain buys. And they were proven right.

“It was [contrarians],” says Vivek Sharma, analyst at Ernst & Young, “who propagated the view that 2012 would be a ‘year of equities’.” January and February saw FIIs pump about $13 billion into Indian stocks (and bonds), and by 20 February 2012, the Sensex was up 20 per cent already for the year. This was long before the Centre shed its apathy (at least publically) towards reforms. But then, indices are ‘lead indicators’. Some believe that bullish players had an inkling not only of the reforms to come, but even their timing, and this gave them an edge. There is another factor: of global funds available. Foreign institutional investors (FIIs) tend to set the direction of Indian bourses; the US and Europe also saw market revivals in 2012 in spite of their economies.

In the longer run, says Sharma, market returns cannot be decoupled from growth. All the same, you may expect an unpredictable 2013 as well.