Today the market hit a 52 week high. [Follow us on Twitter here] and the question arises to many minds, are we in a Bull Market ? Before we answer the same, let us study what Quantifies and what Parameters Set-in for the Bull market in Indian Equities.
Historically, in our Stock Market, the following three parameters have been determining factor- steepening of the yield curve, expanding profit margins and attractive valuations. Other less important yet required factors are ownership, sentiment and liquidity.
Yield Curve – Fundamentally, this tells us what the bond market thinks about growth and, thus, it influences performance of equity markets. Bullish steepening means – short rates are falling faster than long rates, should set the stage for economic recovery. However, in our context INFLATION is a Big factor, so if Inflation is under check, the Yield Curve will be in Favor of Market Rally.
Profit Margins Share price is directly proportional to higher profit growth or margins. Profit margins are the interplay of the investment and consumption rates in the economy. The investment rate reflects revenue potential and the consumption rate is the realization of this potential. In current context, Government consumption is likely to be slow in the coming 12 months, household consumption could be subdued due to sticky food inflation, and investments are unlikely to turn up. So it is safe to conclude that if better policy action backs this, the investment rate will pick up meaningfully, unlikely in a significant way until 2014 elections.
Valuations Currently, valuations either are in the bottom decile [Performance Over Time, rated on a Scale of 1 – 10] or little higher. This augurs well for forward equity returns. Money can be lost if investors buy the market in the top decile and can be made in the bottom two deciles.
So to Sum Up, Yield Cure may get in Investors Favor, Profit Margins are unlikely to improve across the board and will happen on a stock specific basis. Valuations are fairly acceptable in our view and can remain cheap for a
prolonged period in the absence of other triggers.
We remain BULLISH with margins in the coming months eventually scaling itself into a mega margin cycle, but everybody is scared abut the 2014 Political Overhang with rising Citizen Activism and Rampant Mismanagement of the Government Funds and Schemes by Congress led UPA in the last 4 years. We’ll write about the India Equity Strategy in our next post.