[T.S.R:18322] MS: Heralding A New Bull Market?

Morgan Stanley

Are We Heralding A New Bull Market?

 

Key debate:

Narrow indices are past their 200DMA for the first time since February 2011. Sector rotation has hit a 15-month high. Cyclicals are back and the so-called defensives have underperformed. These are tell-tale signs of a new bull market. Is this a case of the market telling us where the fundamentals are heading or is this a head fake? Simply put, are we in a new bull market?

 

First, our view

 

New bull markets are started by favorable liquidity conditions and attractive valuations. At the end of December, both ingredients fell into place. Bull markets make progress as fundamentals improve. Fundamentals can come in various forms such as technology changes

and favorable demographics, but ultimately all these changes imply upward revision in growth forecasts. Not surprisingly, fundamentals remain fuzzy. The market continues to have support from skeptical positioning and low expectations. We expect upward progress, although the pace of the recent move may induce volatility.

 

Now, the facts

 

If this is indeed a new bull market, the preceding bear market at 60 weeks and -26% return will prove to be  shortest and shallowest in 20 years – a far cry from the average 50% fall seen in previous bear markets.

 

Valuations are around 30% higher than what they were at the end of the previous three bear markets. This could create doubts about this being the start of a new bull market.

 

The jury is out, but bears will be tested

 

What do we need to be sure that this sustains as a new bull market? The key difference between the 2003-08 period and now is that global growth is no longer supportive. To that extent, it needs an extra policy push to pull India's growth rate back to trend. Corporates are

suffering from poor profitability – inflation needs to remain moderate for that to improve. That will also help rates to fall.

 

The key risks remain Europe and oil. India needs time to adjust its macro to absorb risks from

Europe and oil. If these risks do not unfold in say the coming six months, the second half of 2012 may prove to be even stronger for equities. None of these are differentiated insights, but the good news is very few believe these events will happen, and markets sometimes favor climbing walls of worries.

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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