>INDIA STRATEGY (MORGAN STANLEY)

A NEW BULL MARKET?

• New bull markets are started by favorable liquidity conditions and attractive valuations. At the start of the rally (which commenced in March 2009), we had both these ingredients in place. Bull markets make progress as fundamentals improve. Fundamentals can come in various forms,
such as technology changes, favorable demographics, etc., but ultimately all these changes imply upward revision in growth forecasts. The ongoing rally got a shot in the arm with the decisive mandate from the electorate in mid-May, raising hopes that the new government can usher in
reforms that can elevate India’s growth back to its potential rate (7-7.5%) and higher. The budget document and other actions of the past month seem to be affirming the initial faith imposed by the market in this development. So we may be well on course to an improvement in fundamentals. Hence, the question is whether we are in a new bull market. There are three obvious possibilities:

• 1) The bear market that started in January 2008 continues, and we were just in a bear market rally. This means that we will either see new lows or at least retest the October or March lows. This scenario is possible if global markets wobble, the policy stimulus falls short of requirements,
and there is a drought. The bear case in our outlook for the BSE Sensex (9718) brings us close to this scenario, though not precisely to its March low.

• 2) What happened between January 2008 and March 2009 was a correction in the bull market that began in 2003. This scenario seems least probable given the extent to which the market fell in the 14 months from January 2008. At 61%, it was the worst fall of any bear market of the
past. The market convincingly broke its 200 DMA and stayed there for a reasonable amount of time. We had four successive falling tops and bottoms as well. The length of the correction at 61 weeks fell short of historical standards (except for the bear market of early 1990s, which
lasted for 55 weeks).

• 3) A new bull market began in March 2009. The market is now well over its 200 DMA, the breadth has been strong, and the gains are reminiscent of nascent bull markets of the past. The market is up 69% in from its March 2009 low. This compares with 37%, 27%, 25%, and 47% in the first 18 weeks of the previous four bull markets over the past two decades. In our bull-case scenario, the Sensex hits a new high over the next 12 months.

• 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 8.5%. In the near term, a bad monsoon or bad global outcome could delay or derail the fledgling bull market. The skeptic may argue that this “bull market” has not produced new leadership that is normally associated with new bull markets. The best-performing sectors are not different from the sectors that led the previous bull market. For that matter, the worst-performing sectors are the same, namely, Consumer Staples, Technology, and Healthcare. The jury is out on whether this is a new bull market given the lack of new sector leadership, i.e., this could still be a bear market rally. It may take time to confirm the rally (since March 2009) as a new bull market, and it is quite possible that sector leadership changes as this becomes a full-fledged bull market. Our bet is that the consumer will lead the charge and hence consumption sectors such as Autos, Media, Education, Retail, and midcap Staples could be the next bull market’s leaders.

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