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Rediff.com  » Getahead » The Market is bullish. What does this mean?

The Market is bullish. What does this mean?

By Larissa Fernand
Last updated on: December 15, 2004 08:34 IST
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n these times of a booming stock market, I can't help but think of Snow White's stepmother gazing dreamily into the mirror and asking, "Mirror Mirror on the wall, who's the fairest of us all?"

I know what you're thinking: What does a narcissist like her have to do with the stock market?

Nothing, actually. It's the mirror I am after.

Come on, would you not want to look into that mirror and ask, "Mirror Mirror on the wall, can you tell me when the Sensex will fall?"

I, for one, have no such mirror and have to rely on what the experts say. Interestingly, they all seem pretty unified as far as their broader observations are concerned.

So bear with me as I try to echo their sentiments in plain and simple English.

1. A bull run is definitely on

A bull market refers to an extended period (months or years) of a general increase in the price of the shares.

Now everyone knows that. But, what the experts are saying is that they do not expect this rising price trend to get change (start falling) in the near future.

2. We expect a lot of volatility in the future

This means the Sensex could suddenly come crashing down. If you have shares, don't panic and sell them. The Sensex will soon begin its upward climb. This behaviour is referred to as a 'correction' in technical terms.

The term correction is used to describe a relatively short-term drop in stock market prices. It tends to happen when prices have been consistently rising for a period of time.

Experts are also making predictions on the band (the upper and lower limit) within which the Sensex will fluctuate.

Some very bullish analysts feel that, for the next year, the Sensex will fluctuate within the 7,200 to 8,000 range. Some are pretty confident of the Sensex touching 8,000 by the end of 2005.

Others are more conservative and feel the Sensex will stick to the 6,800 – 7,200 range over the next year.

Then there are those who say that, soon after the correction (which should happen anytime soon), the Sensex will hover between 6,600 – 6,900.

Yet others prefer to sit on the fence.

One analyst said he does not rule out a strong bull run but feels one year is too long a timeframe. Anything could happen. To make his point, he reminds us that recent bull markets have rarely lasted over a year.

The verdict: He is smart. Whatever he says could turn out to be right.

3. The market is running on good fundamentals

Fundamentals refer to the financial characteristics of a company -- things like how much money it owes its lenders, how much of a profit it is making, etc.

If a company is going deeper into debt and making less money each year, its fundamentals are said to be deteriorating.

Investors today have noticed that Indian companies have seen huge gains in productivity over the last three or four years. This is because of a number of factors like improved management performance and inventory management.

Inventory management refers to the handling of all functions related to the tracking and management of raw material and other products. It ensures the availability and smooth flow of such goods.

What the experts mean when they say the market is running on good fundamentals is that this is not a case of smoke without fire. Companies are actually performing well.

It has also been pointed out that almost every sector (industry) has participated in this bull run, which began in May 2003.

The bull run reflects the state of corporate (business) India. Many experts feel the Indian economy is going to experience rapid growth in the coming years.

4. The FIIs are here to stay

Don't say who cares. If you have invested in the stock market (or would like to), you should. Care, that is.

In 2003, foreign institutional investors (foreign companies registered in India and who have permission to buy and sell shares of Indian companies) invested $ 9.949 billion in Indian equity (companies that are listed on the stock exchange). This year, the figure has touched $ 8 billion till date.

This is a big reason as to why the Sensex has risen.

The reasons why FIIs are courting India is no secret.

They see India as a good destination to invest in and make money. They are happy with the Indian government's commitment to economic reforms.

They are also looking closely at sectors (and companies within these sectors) which they think have potential. In fact, the growing competitiveness of Indian companies is an enticing factor.

Don't forget the tax factor. Long-term capital gains tax -- which is the tax you pay when you sell your shares after more than a year -- has been abolished; you can sell your shares without having to pay the government any kind of tax if you do so after a year.

Then, of course, there is the push factor. The dollar has been falling in value vis-a-viz other currencies. As a result, FIIs don't find the thought of investing in the US market all that attractive. They know they will make more money if they invest elsewhere.

Let's use an example to make this clearer.

Let's say $ 1 = Rs 50. If the value of the dollar falls until $ 2 = Rs 50, it means the dollar has weakened and the rupee has strengthened.

If the value of the dollar rises and $ 1 = Rs 100, then the dollar has stregthened and the rupee has weakened.

If the dollar is weak, FIIs end up with more dollars when they convert the rupees they make into dollars. If the dollar is strong, they get less dollars for their rupees.

Hence, they will invest in India when the dollar is weak and the rupee is strong vis-a-viz the dollar.

But what if the tables turn? What if the dollar becomes stronger? What if India no longer looks unattractive as an investment option?

Well, the FIIs will not bat at eyelid about ending their passionate affair with the Indian stock market. They will set up shop wherever greener pastures beckon.

What the cynics have to say

Investment player Morgan Stanley (Morgan Stanley Investment Management Private Limited) stands apart from the crowd. The firm has warned that Indian stocks are already overpriced, inflation could hamper the growth of the economy and, should the dollar strengthen, the FIIs will disappear.

But, like I said, Morgan Stanley seems to stand alone. Between January and September 2004, the number of FIIs registered in India went up from 527 to 608.

India is shining, money is pouring in, the good times are rolling and the Sensex is galloping.

So says the mirror.

DON'T MISS!

What to do with your money

Why this bull market is for real

Why the FIIs are really here

Can the "FIIs only" rally last

Sensex may touch 7,200 in a year

Image: Uday Kuckian

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Larissa Fernand