The Bombay Stock Exchange, BSE or Sensex, the primary stock market in India, was in recovery mode along with other markets around the world, since the mid-March bottoms. However it was a pretty sluggish rally, with uncertainty over India’s political future. The decisive Congress/ UPA win put an end to that uncertainty, and it is time now for the Sensex to play catch up.
The Sensex surged 2,111 points to 14,272, instantly taking its place as the best performing stock market this year. Together with the 26 per cent gain preceding Monday, it had grown 48 per cent in 2009. The Rupee mirrored the stock markets gains, rising 3.08 per cent against the dollar to a five-month high of 47.88/89, based on an expectation of foreign direct investment and investor capital inflows.
Two factors came into play on Monday. Firstly, as we reported yesterday, some big market players bet on political uncertainty and shorted the markets. They scrambled to cover their shorts as soon as the market opened. Conversely, other traders on the sidelines jumped straight in on the hopes of riding this wave.
Where do we go from here?
As the results and their implications on Indian economic policy sink in, India will come to be seen as one of the lowest risk growth markets in Asia and indeed across the emerging markets. This means that both large international funds and small retail investors will be buying into the India story. Morgan Stanley, who run world investment indices, have just upgraded Indian stocks from ‘underweight’ to ‘overweight’.
Conversely, the rally on what some have dubbed ‘Magnificent Monday’ was so dramatic that fundamental analysts now see that Bombay stocks are too expensive.
“Markets can go up some more but valuations are looking overstretched” so investors should proceed with caution, said Anoop Bhaskar of UTI. Bloomberg data backs up Anoop’s, claims. Sensex shares are now trading at 15.56 times earnings, double the 7-8 times earnings that were being traded at the end of last year.
Early trading today (Tuesday) has been choppy, signalling that indeed there will now be profit-taking, short-covering, new investment and possibly some new shorting going on as everyone tries to get their heads around the new reality.
Investors looking for opportunities make want to pick strong stocks in among small caps and mid caps; these two sectors did not take part as strongly in the rally as the large caps.
Dwayne Ramakrishnan, EconomyWatch.com