Sensex Breaks Best-six-month Rule

Updated: Jul 31 2003, 05:30am hrs
The Indian stock markets have defied the best-six-month rule in the current fiscal, in tune with the trend in the US. The stock market investment rule says that the majority of stock market gains take place between November and April and the losses are disproportionate between May and October. This year, in the first three months of the May-October period (till July 30), the benchmark BSE Sensex has already jumped over 27 per cent!

The big question now is whether the current momentum would sustain or are we heading for a fall over the next three months Marketmen say that the undertone is fairly bullish in the near future.

Historically, the Indian markets have more or less been conforming to the best-six-month rule. Consider this: In four of the past five years, The Stock Exchange, Mumbais (BSE) Sensex returns between May and October have recorded a negative 13-32 per cent. In six of the past seven years and eight of the past twelve years, Sensex returns between November and April have been higher than the returns (positive or negative) during November to April period. The only exceptions in the past twelve years have been the fiscals 1992-93, 1994-95, 1995-96 and more recently in 1999-2000.

Market sources say that even after the 27.43 per cent returns since May 1, the Indian equity markets are undervalued compared to their global counterparts. The current rally is expected to continue by the good quarterly results corporate India has been coming up with.

According to IL&FS Investsmarts head of investor advisory and portfolio management services, Sharad Shukla, investors globally are looking at the emerging markets for investments. With high growth rates in India, international capital will find value in the Indian markets. Thus in wake of good corporate numbers, global competitiveness and increasing export, the Indian equity market seem to fairly undervalued. The Sensex forward price to earnings ratio (PER) is still in the Rs 11-12 range. We continue to maintain our bullish stance on the equity markets.

There is an increasing interest in the old-economy stocks from sectors like steel, cement, refineries, automobiles and its ancillaries besides pharmaceuticals and banks. FIIs have been buying into the frontline companies in these sectors. Mid-cap stocks have also become the darlings of the market on back of robust growth and low valuations, a Delhi-based broker said.

The good thing about the current rally is that it is not limited to the frontline stocks. In fact, the mid-cap and small-cap stocks have been its biggest beneficiaries. The NSE Midcap index has shot up about 50 per cent in three months since May 2003, much higher than the benchmark indices like BSE Sensex and NSE Nifty, which represent the top rung bluechips.