Market rally: Twist in the tale

Source: BS
On May 11, the Sensex touched a new high of 12671 points and things were looking quite rosy in spite of the US Federal Reserve hiking interest rates by 0.25 per cent to 5 per cent two days earlier.

But within about a week, the tables have turned with the market falling 14.77 per cent from its high. With Friday’s closing of 10,938 points, the Sensex is back to its March levels. If FIIs were net sellers of Rs 3676 crore between May 11 and May 18, local funds did buy shares worth Rs 2,372 crore. So, net outflows from institutions of Rs 1,300 crore do not justify such a steep fall.

Even a correction in metal prices can only have limited impact in a normal market. But in a weak market, small reasons precipitate declines and margin calls push them down further. What has changed is the outlook of investors. With signs of hardening interest rates going forward, equities may not be as attractive to global investors.

If the India story was strong with expectations that our markets could withstand an emerging market sell-off, then that is not true, at least at prevailing valuations. With trailing Sensex P/Es of 21-22, valuations may not have been at the April 2000 level of 34, but they were still high. On Friday, the Sensex P/E multiple came down to 19.4.

The saving grace is that the business environment and corporate earnings are still fine so far, and the economy could handle a little interest rate hike. But the sound bites from the Left Front are a source of worry. A correction in a market that has gone up one-way for over six months can also be termed healthy, except for those investors, who invested substantially in the past two months.

For investors, it has been an expensive lesson to learn that markets do not go up all the time, and that they need to temper expectations.

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