Will Friday’s catch-up rally have legs?

With foreign funds liquidating at every bounce…

MUMBAI: A swift half-point cut by Federal Reserve governor Ben Bernanke on Wednesday fired global markets, which rallied between 9% and 13% on Thursday.

The US also agreed to infuse as much as $120 billion temporary liquidity into Brazil, Mexico, Singapore and South Korea, and the International Monetary Fund approved an emergency loan programme.

India missed the action because of Bhai Duj, but the million-dollar question is whether Friday’s catch-up rally will sustain.

And because short-build-ups have been limited, Friday’s gap-up open may not stretch for long, said a market maven, who did not wish to be named.

That’s because foreign institutional investors (FIIs) and hedge funds continue to face redemption pressures.

Anil Advani, head of research at SBICAP Securities Ltd, said redemption pressure is unlikely to ease in emerging markets any time soon.

“It is likely that FIIs will continue to sell although Asian markets were up on Thursday,” Advani said.

Ajay Parmar, head of research at Emkay Global Financial Services Ltd, concurs, saying the amount of money invested in India is not substantial in the larger scheme of things.
“So FII outflows are likely to continue. Liquidity may ease at another level. The US markets might see positives but as far as FII selling is concerned, India is not likely to see a reversal in trend,” Parmar said.

In 2008 so far, FIIs have sold stocks worth Rs 51,064 crore or $12.7 billion.
They are still sitting on Rs 232,404 crore or $53.7 billion of Indian stocks as on October 27, 2008.

That means to date this year, FIIs have liquidated only 18% of their portfolio, which has brought the Sensex down 58%.

With Thursday’s jump, emerging markets have surged 20% in three days.
Interestingly, in the developed-world markets, a 20% gain in a stock index is the common definition of a bull market; 20% losses are considered bear markets.

Some investors have a less strict measure of turning points.
“It’s too early to call it a bull market,” said Clecius Peixoto, who helps manage about $10 billion in emerging-market stocks at Emerging Markets Management LLC in Arlington, Virginia.

“I wouldn’t consider this three-day gain a bull market because it comes in the back of the worst month in emerging markets.” 

Ridham Desai and Sheela Rathi of Morgan Stanley said a new bull market will take at least 18 months away.

“Any recovery in the market is likely to be a long drawn out affair, in our view - it is unlikely that we get a V-shape recovery out of this bear market. Even if we assume that the market has hit its bottom, previous bear markets show that the market almost always tests the previous low before a new bull market gets under way. This process of retesting took between 15 and 24 months in the previous three bear markets of the past 18 years,” Desai and Rathi said in a report on Wednesday.

Experts said the Fed and other central banks will continue to cut rates, going forward.
Jitendra Panda, senior vice-president, business associate group, Motilal Oswal, said the Fed’s rate cut was along expected lines and actions such as this are likely to have a positive impact on the global scenario.

The effect will be seen in a gradual rather than an immediate manner.
The RBI action on inflation took 2-3 months to come into play.

“The system is still not working. The banking system needs more trust for it to be effective. There doesn’t appear to be any confidence among people,” said SBICAP’s Advani.