Return of the big 'Bull Run'

A 'Bull Market' can be defined as a prolonged period in which investment prices rise faster than their historical average. Bull markets are a result of economic prosperity/ economic boom or investor psychology, or a mixture of both. Bull markets are typically characterized by general optimism, investor confidence and expectations of strong results by companies. Long term investors pray for continuation of the bull run. Equity markets of the world have had two distinct bull markets in the recent past: The bull market of 90's lead by technology stocks, which ended with the dot com bubble; and the bull market of 2007-08 lead by commodity stocks,which ended with the sub-prime crises and recession. Looking at the spectacular rise in equity indices since their mid March '09 lows, the question foremost in every body's mind today is: has the Bull market returned for Indian equities?

I for one hold a strong view that worst is over for the Indian equity market, and we are fairly close to the start of a spectacular 'Bull Run'. The reasons for my conviction are many:

• Economic Growth in India, lead by the domestic consumption, continues to be robust. World Bank has upgraded India's growth prospects for 2010, some economists have forecast Indian economy to overtake the growth of China's GDP next year.
• The installation of a stable Govt. at the centre has been responsible for revival of 'Investment appetite' in India. According to Nasdaq Equities Magazine article political changes are one of the three biggest causes of Super Bulls and Super Bears.
• According to technical trends 'Fibonacci analysis and Elliot wave theory', the last bull run in India lasted 57 months (from April '03 to January '08), hence the current bear phase should last around 19 months, or around August '09. This would be the time for revival of the next secular bull market.
• Soft interest rate scenario and lower inflation auger well for the start of the next bull run, as the returns from fixed income securities is continuously on decline. The money waiting on the sidelines will thus flow to equity investments.
• With the pension sector reforms, and the launch of 'New Pension Scheme' from 1st May 2009, close to Rs.1,00,000 cr. is likely to be invested through this scheme, a fair chunk of this money will find its way to the equity markets.
• Relative stability/strength of the Rupee vis-a-vis the US Dollar augers well for the flow of FII money into Indian equities. The revival of PE (Private equity) investments is also positive for Indian markets.
• The recession in World Economy has reached its peak, and economic revival is expected to start from the last quarter of 2009. This will restore stability to the fortunes of global businesses of Indian companies.
• The strong rural demand will give a big push to Indian domestic companies. The stimulus packages announced by the Govt./ to be carried forward through the budget will have a positive effect on the demand.

Coming to the fair value of our markets, I would like to stick to the basics: The historic PE multiple for Indian markets has been around 15. At 15000 BSE Sensex, our markets are fairly valued at 15 times forward PE, or 17-18 times trailing PE. For small investors, it is advisable to wait for an entry at lower levels (around 13000 on the Sensex, or 3900 on the Nifty). If the markets turn euphoric post budget, it would be prudent to book some profits above 16000 on the Sensex.