Have the stock markets turned around? The markets are appealing again. Both the benchmark indices - Sensex and Nifty have managed to get back to the previous prestigious levels; Sensex has touched 10000 mark and Nifty, 3200 mark.
The on-going rally prompts many questions. The foremost being - what are the reasons for the recent rally and how long will the recovery sustain? What are the indications of this rally? Has the bear phase has ended and is this the beginning of bulls phase again? Can small investors get back into the stock markets and trade in a big way?
The reasons for the earlier falls are - the news of growing distress faced by American automakers and weak economic outlook by US banks which distressed domestic stocks. Besides, there was also the result of investors intentionally booking losses before the fiscal year end for tax purposes. However, the driving forces for recent gains of global equity markets:
Global trends
The Asian markets have been strong. Wall Street has witnessed smart recovery. The global markets have performed well as the instances of economic recovery have emerged due to stimulus packages rolled-out in many countries, especially in US. There have been some indications of revival. Consumer spending in the US was up for the second month consecutively, and there is revival seen in house sector as sales have recovered slightly. Commodities are up piercingly from their December lows, and manufacturing looks like picking up in China. Moreover, the US has announced plans to buy toxic assets from banks, which assures boosting the global financial system. Both the markets – developed and emerging – are up around 25% from their lows reached earlier this month.
Economic factors
The macroeconomic factors have been favorable. The inflation rate has tumbled close to the zero level. There have been interest rate cuts announced by RBI from time to time in accordance with the inflation falling down. Demand for consumer goods is firm as well.
Investors
Foreign institutional investors (FIIs) and domestic institutions also have started raising their investments again. Investors are anticipating a further cut in domestic lending rates. This stimulated the interest rate-sensitive realty and capital goods stocks. In addition, the large-cap schemes of mutual funds have shown increased inflows from investors. Some positive corporate developments are driving markets in the set direction. To note, steel producers declare running at full capacity, cement dispatches are also strong. So, things are looking bright again.
Matters of concern
At present, the return on government bonds is on an upward trend. The government has announced plans to auction bonds worth a massive Rs 2,40,000 crores in the next six months. But, it is expected that such a heavy borrowing program will not be very successful at the current interest rate levels. The government essentially has to make the bonds attractive with higher yields. In turn, this might have a cascading effect on the economy and the stock markets as well.
If the borrowing cost of the government goes up, the interest rates applicable to corporates and individuals will also rise resulting into interest payments and lower profitability. It will further reduce the demand for interest rate-sensitive products. This may affect equity markets adversely.
What to do?
If you are a risk-averse individual investor, you need to stay away for the time being from current pull-back rallies. When it comes to market fall down, it happens equally sharp as a rally. Avoiding a slippage is complex for individual investors. It is better to buy value stocks on dips for individual investors.
At the moment, some blue-chip stocks are obtainable at historically low valuations. You have a good chance of earning good returns if you buy them at regular intervals. Don’t wait for the market to bottom out. Tap the opportunity when it arises, and certainly, analyze before you invest.