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More upside than downside risk for stocks

This article was posted on Mar 25, 2009 and is filed under Market News

MUMBAI: The Indian stock markets have rallied nearly 30 per cent from the lows of October 2008. The global stocks have rallied strongly in the Dalal Street past few days, but such rallies are typical of a bear market.

But could this bounce be something bigger and continue for some time to come? Or prove to be the bottom for the markets? Even during the Asian financial crisis of 1990-91, Asian markets saw a bear market rally of nearly 50 per cent.

“History shows that bear markets end when monetary policy is eased aggressively and the banking system is sorted. The former has now happened and the latter may soon happen. There seems more upside than downside risk for stocks,” said a report of HSBC Global Research.

When recession is caused by a financial crisis, stocks tend to bottom when the last troubled bank is rescued – even if the economy remains weak for some time after. And when stocks do bottom, the rebound can be huge: the US Dow Jones Index rose 371% in the five years after it bottomed in 1932.

A recession and bear market do not last for ever. The US and Asian markets have fallen as much as they did during the Great Depression of 1930’s and the Asian financial crisis. Even if one goes back to 190According to the HSBC report, the longest US recession since the Great Depression lasted only for 16 months. There is also a consistent tendency for the stock market to bottom between 2 and 10 months before the end of the recession, with an average since 1900 of four months.

The Planning Commission of India recently said that the economy will grow by 6.5 per cent though much below than 7.1 per cent projected by the government. However, the growth projection is better given the global economic recession. Even Prime Minister Manmohan Singh has said that India’s economy will rebound sharply in the next 6-7 months on the back of the series of fiscal and monetary steps taken.

Commenting on the market, Sachin Belose, analyst with Target Capital Consultancy, said, “At current levels, valuations are very cheap. There may not be much selling at lower levels as players are not willing to sell at rock-bottom prices. Over and above, policymakers have reacted aggressively to the slowdown with enormous fiscal stimulus and the rate cuts spurring ray of hope for the stock markets.”

Though there are side effects of low interest rates and budget deficits in the long run, from the short term point of view it is considered necessary.
If governments across the globe tighten fiscal and monetary policy to support widening deficit, global economy may afresh slip back into the recession.

“But for the moment, it seems to us that there is more room for markets to extend gains rather than a downside risk. And, even if this turns out to be only a bear market rally, it could go on for a while. There is probably no point in being excessively bearish just now,” the HSBC report concluded.

“The Sensex, after encountering resistance at 9000, has rallied further this week above the level. The declining volumes indicate the rally may continue in near term, while a close above 9650 would signal a test of 10,500. Reversal, on the other hand, would signal a test of 8500 again. On money flow, the Sensex has showed a bullish divergence,” said Vijay Gala, analyst at Pinnacle Wealth Management.

Wednesday at 1:16 pm, NSE’s Nifty was trading flat at 2938 levels while, BSE Sensex was trading 0.27 per cent up at 9496 levels.

source: Economictimes

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