Led by a landslide victory by the Congress, the UPA has returned to power, with a strong coalition that removes a huge overhang among investors. I had indicated in my previous blog that markets will revisit October 2008 lows if the new government has to take support of the Third Front, which includes Left. The Indian voter turnout to be smarter voted for stability, defeated communal forces and sideline Left for their anti-development economic policies.
The expectation from the new government is reflected in the first trading day after election results on Saturday with the benchmark indices frozen to upper limit of 15 per cent in just nine seconds and trading was halted for the day. Investors now expect big bang economic reform with key pending bills such as insurance and pension to be passed. The market expected to be firm from here and the FII inflows expected to increase due to political stability.
If the corporate earnings cycle improves, we may revisit January 8, 2008 Sensex high of 21,000 any time in the next 12 months. Most US macro data and credit market indicators are showing some improvement. However, incremental gains are modest and indicate continued growth contraction ahead following two quarters of GDP decline of -6.4% (QoQ) and -6.1% (QoQ) during the fourth quarter of 2008 and the first of 2009.
However, the historical evidence shows investors entering the equity market at lower level get a market return of over 50 per cent within six months and the recent slowdown considerably thereafter. Investors entering the equity market after 150 per cent performance get a modest return after three-five years. According to a Credit Suisse report, if you buy the market after a drop of 40 per cent, the probability of posting a positive return after three years is over 70 per cent. After five years, it goes up to over 80 per cent, against close to 40 per cent if you buy after a long rally.
The Sensex has appreciated by 75 per cent in two months from its low of 8,160 on March 9, 2009. So, the short-term upside is limited and for long term gains, economic recovery is the pre-condition.
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“How much longer sir?” my neighbour, who always seemed to have the Midas touch, asked my father. This neighbour, I have always believed, has the knack of sniffing out business opportunities. He and his wife must have half a dozen streams of income.
He was enquiring about the economic slowdown that has seen everyone tightening their purse strings, and has left him holding his head in his hand and wondering how he would be able to pay his Rs 40,000 EMI on a loan he had raised to build his four storeyed building with five flats. He had hoped to rent them out, preferably to vegetarian IT professionals.
He has waited, waited and waited. His query on the slowdown came in utter frustration over the disappointment that few IT professionals were interested in renting his house or none were ready to pay the rent he wanted. “I have custom-built the house for an IT professional” was his argument. It suits them best. I had heard of custom-built office spaces, but this was the first custom-built house for an IT professional.
What about someone else who may be ready to shell out an amount acceptable to him? No sir, he said, “Others cannot understand how to use the electrical fittings I have spent so much on. Many of the fittings are those you find in the US and many of the IT professionals travel abroad and understand their use.”
“I will wait for a month and visit Tirupathi to ask for the lord’s help.”
Now, he is ready for a compromise it seems. Do people from any other industry have such spending power is what he wants to know now. I have been asked to find out who else could afford the rent and of course still are vegetarians.