The current rally has added 48% to the SENSEX relative to February 2009 low of 8160 points. Is this the start of next Bull Run? The market players and traders will make you believe it is in fact the start of next Bull Run. Any rational investor will ask himself one question, what has happened since February 2009 that justifies this rally. Has the global economy turned around? Has the Indian economy turned around? Has the earning of companies turned around? Or the general question can be has it even stabilized to say it is turned around? Some may argue that equity markets are leading indicators and hence things have changed for better.
The real economy across different countries and India has showed continued sign of slowing down. The US economy contracted by approximately 6% last quarter, European economy shows no sign of stopping the slide, and Japan has been in 18 year downward spiral. In addition, the export oriented economy of emerging markets continues to slow down. Russia is in tatters, Brazil is hit by reduce material demand, and Indian companies are looking ways to maintain profitability. China is attempting to spend its way out of this slow down.
In addition, I looked into the latest quarterly earnings of the 30 Indian corporations that are included in the SENSEX.
- I compared total income, operational profits, gross profits, net profits, and earnings per share.
- In most cases, the latest quarter was quarter ending March 2009 while in some case it was based on quarter ending December 2008.
- Red indicates negative, Green indicates positive and Yellow indicates no changes in quarter-over-quarter results.
- Table 1 below shows the mapping of this performance for all 30 companies.
As you can see in the table, there are more negative attributes than any positive indicators. Only seven companies are showing positive results across all parameters, while eleven companies are showing negative results. In the remaining 12 companies are also showing mixed results.
Another aspect that is very surprising to me is corporate leadership completely mum on the impact of Indian Rupee depreciation. When the Indian Rupee was at Rs 39 to a dollar, there were slew of media news that it is negatively impacting billing rates (and margins) of our exporters. Now that the Indian Rupee is trading at approximately Rs 50 to a dollar, shouldn’t that increase the earnings?
I believe that the slow down has had significant impact on earnings. But it is somewhat blunted (i.e. impact is reduced) by the Rupee depreciation. Since this is a positive affect, this is being pushed under the rug.
All signs are telling me that this rally is another example of irrational exuberance. Market makers and traders continue to lure investors into this game and take their profits. These kinds of rallies are never sustainable because fundamentals do not justify it. It has happened before, and I would tend to believe that it will happen again. The only question that remains is when and at what point?
The bull is running for the red flag. If you want to ride this Bull then position yourself for soft landing.