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Bull runs, bear markets and the year ahead Indian equities have advancedin 23 of the past 35 years. What about 205!

Investors in Indian equities have "ust had their best annual run in #veyears. $he mood in tradin% rooms continues to be cheerful. &autious

optimism is a euphemism that is bandied around a lot these days. But itmust be remembered that hope has played a bi% part in the on%oin% rally.'ee ho( much of the %ain (as concentrated in the (eeks since the%eneral election (as announced till the fortni%ht after )arendra *odirodeto po(er on the back of the stron%est electoral mandate in decades. $hebenchmark 'ense+ moved from 20,3 points on 3 -ebruary to 25,50on /une. $he stock market has performed more modestly since then. $he*odi rally (as based on rekindled hopeof political stability as (ell as ane( reforms push. Investors have been more cautious since then. $heconsensus on the street is that equity prices (ill continue to rise in 205,but much depends on (hether the %overnment matches its policy rhetoric(ith action in the comin% months, corporate #nancial performanceimproves and the %lobal economy does not serve any nasty surprises.Investors (ould no( rather see (hether the %overnment is prepared to(alk its talk1 there is an undercurrent of impatience as (ell. *arkets lookfor(ard rather than back(ard (hen they price risk. But history has itsuses. look at the annual returns on the 'ense+ since it (as launched in can o4er us some interestin% clues about (hat lies in store. $heinde+ has advanced in 23 of the 35 years (hile it retreated in the other2. $here has thus been t(o years of advance for every one year ofdecline. o(ever, it is ho( these movements (ere distributed since

that is (orth lookin% at more closely. $here have been three episodes ofclear bull runs since . $he #rst (as (hen the 'ense+ rose in si+ out ofits #rst seven full years, at a time (hen the #rst tentative economicreforms loosened some of the most draconian controls on corporatee+pansion as (ell as the 6urry of initial public o4ers that marked the birthof the Indian equity cult. $he second period (hen the equity inde+ rose forfour years in a ro( (as bet(een and 2, punctuated by aneconomic crisis and the radical economic reforms, (ith a "a(7droppin% rise of 2889 2, thou%h it (as later revealed that thestratospheric rise in that year involved price ri%%in% (ith money stolenfrom banks. $he third period (as the four years bet(een 200: and 200,

(ith its combination of record economic %ro(th and easy %lobal liquidity.$he only episode of three consecutive years of decline in the 'ense+ (asbet(een 200 and 2003, a real bear market for Indian equities. $hese(ere years (hen economic %ro(th collapsed (hile companies (ere stillbo%%ed do(n (ith e+cess levera%e built in the decade after the reforms. ;lobal markets (ere also (eak after the end of the dotcombubble. $he 0s (ere a volatile period, ho(ever, (ith the ei%ht yearsfrom 3 to 2000 seein% a year of advance, follo(ed by a year ofdecline, follo(ed by a year of advance (ith metronomic re%ularity. $hemovements in the equity indices over the past 35 years sho(s that rallies

that have sustained over multiple years are accompanied by three factors

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%ro(th and beni%n %lobal #nancial indications. What happens in 205 (illdepend a lot on ho( these three factors play out in the comin% months.Will the *odi %overnment #nally be%in to match its rhetoric (ith actualpolicy reforms! Will corporate #nancials continue to improve! Will theemer%in% markets remain stable if the =' be%ins to increase interest

rates! nd (ill the sharp decline in %lobal crude oil prices une+pectedlyreverse!