Sentiments continue to play a huge role in the Indian market
The market has been in rally mode, rising by nearly 17% for the last six weeks and the Sensex is currently past 18,000. Foreign institutional investors (FIIs) seem to have discovered India all over again, betting more than a billion dollars on India in a jiffy. The sentiment is extremely strong, despite all the news and opinion of gloom and doom—from scams in India to problems in Europe to slow growth in the US. The latest corporate earnings haven’t been too spectacular either, yet the markets shot up. Why? Well, for starters, the Indian market was mildly undervalued in late December. At a Sensex of 15,200 the PE was 13.4.
With the New Year came a massive liquidity boost which caused sentiment to change overnight. Ben Bernanke, the chairman of US Federal Reserve announced that interest rates will be low as long as it is needed. This caused hedge funds and FIIs to pour money in risky assets such as emerging markets. Since the Indian market had underperformed grossly in 2011, it bounced back the most. Additionally, the European Central Bank (ECB) pledged support to keep the European Union alive and keep Greece in the Euro. Further, the Reserve Bank of India (RBI) cut in CRR by 0.5% to 5.5%. Investors assumed that interest rate cycle has peaked in India.
So what happed to all the gloom and doom stories in the media, the continuous lament about the lack of reforms and poor governance? The fact is stock markets are always sentiment-driven. It takes a few good or bad news to turn the market around, for better or worse. We all are well aware of the lack of policy initiatives from the government and its talks of “reforms”. These things come up in a bear market and disappear when a rally starts. People simply forget them, especially since the media is always looking for cause & effect and never highlight that short-term market movements have nothing to do with long-term issues like reforms. From early December 1996, the Sensex rallied more than 60% till August 1997, on some hope or the other. It fell after the Asian crisis but rallied again 45% from December 1998 to April 1999, on another set of misplaced hopes. After all, it is not “reforms” or governance that caused the Sensex to rise 80% in 2003.
The fact is, after a deep decline, investors only need the flimsiest of excuses to buy. This is exactly what has happened this time—as it has happened many times in the past. People forget all the time and the media, which shapes popular opinion, have no truck with history. Hence the surprise all around.
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