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If rhyme of historical past holds, a market correction is probably going

 

Mark Twain didn’t have a lot to do with inventory markets. However market individuals throughout occasions of crashes and restoration often resort to his well-known quote: ‘Historical past by no means repeats itself, however it does usually rhyme.’

Nicely, Sensex of 2006-07 and Nifty of 2020-21 do appear to rhyme. The truth that Nifty in February/March 2020 was across the similar 12,000 ranges at which Sensex was in April/Might 2006 is simply the place to begin of this similarity.

In lock-step

By Might 2006, Sensex had had the run of its life. From a publish dotcom bust bear market low of round 2,600 in September 2001, the index had given CAGR returns of 37 per cent to succeed in an all-time excessive of 12,671 by Might 2006. What adopted was a shocking reversal beginning Might 18 triggered by US inflation knowledge/charge enhance and sudden fall in steel costs. In a bit over a month, the benchmark index had corrected by 30 per cent.

Sounds a bit acquainted, doesn’t it? The Nifty index, after reaching document excessive of 12,430 in January 2020 (much like Sensex highs in 2006) and hovering above 12,000 until mid-February 2020, had as gorgeous a crash over the following month as fears of a Covid-driven financial disaster engulfed the world.

What transpired in each the indices following the quick bearish part was a marathon rally lasting 18 months. Whereas the Nifty of at this time is up 131 per cent within the 18 months from its March 2020 lows, the Sensex then was up a close to matching 125 per cent from its June 2006 lows in 18 months.

 

Fundamentals distinction

Nonetheless, the underlying elements behind the rally at each occasions are a research in distinction. The years resulting in FY07 have been a interval of accelerating financial development for India whereas in FY21 recession stared at us, with GDP contracting 7.3 per cent.

The worldwide financial system, too, witnessed considered one of its finest phases of financial enlargement because the Second World Conflict (WW2) between 2003 and 2007 and noticed the worst recession since WW2 in 2020.

Issues that the financial system might overheat led to central banks rising rates of interest then. In distinction, heading into the hunch of March 2020, the worldwide financial system was coping with a decade of low financial development, low inflation and declining rates of interest. Quantitative easing (QE) was solely a theoretical idea in 2006-07, whereas the huge QE pushed financial stimulus by international central banks is the issue driving markets at this time.

Company earnings have been booming then with Sensex earnings CAGR at round 25 per cent within the 5 years into 2007.

The Nifty earnings CAGR within the 5 years into 2021 have been a paltry 5 per cent. The Sensex trailing PE was at 21 occasions then versus the Nifty trailing PE of round 30 occasions now.

The index management then was from Energy/Infra and Actual Property shares with blue chip IT providers corporations underperforming and giving adverse absolute returns in 2007 as a consequence of worries from the affect of the numerous rupee appreciation that yr.

In distinction, IT providers corporations have been leaders within the present bull run though satirically their income/earnings development now could be a lot decrease than in 2007.

There have been, nonetheless, a number of similarities, essentially the most attention-grabbing being the increase in US housing costs throughout each these occasions. The document variety of IPOs and the frenzy round it in addition to the bull run in commodities is one other similarity.

What awaits?

In all probability what has panned out to this point is only a coincidence. Nonetheless, if the rhyme of historical past continues, then a major correction is probably going. Bear in mind 2008?

That mentioned, relating to markets, one can solely deal by way of chances and never certainties.

All-time excessive valuations and the truth that the worldwide financial system is at this time depending on financial and monetary stimulus that won’t proceed perpetually, do indicate that there are dangers to the present rally.

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