2003: Bulls leave their mark... - Views on News from Equitymaster

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2003: Bulls leave their mark...

Jan 9, 2004

December 31, 2002: Investors across Wall Street were sifting through the stock market report that chronicled one of the worst phases in the history of US stock markets on this side of the World War II. From dizzying heights of the 1999 tech bubble, the markets had tumbled for the third year in a row and the mood was that of extreme agony. December 31, 2003: The two US stock market gauges viz. the NASDAQ and the Dow have galloped away with such intensity for most part of the year that the tech laden NASDAQ has recorded its third best performance ever, behind a 57% rise in 1991 and a huge 86% rise during the tech frenzy of 1999. Dow also, has notched its strongest gains since 1996.

Its amazing what difference a period of 12 months can make. And this phenomenon was not restricted to the US stock markets alone. One glance at the table given below and we know that all the major indices across different parts of the world have registered impressive gains in 2003.

Index Country 31-Dec-02 31-Dec-03 % Change
NASDAQ US 1,336 2,003 50%
DOW US 8,342 10,454 25%
NIKKEI Japan 8,340 10,677 28%
HANG-SENG Hong Kong 9,321 12,576 35%
BSE-SENSEX India 3,377 5,839 73%
FTSE United Kingdom 3,940 4,477 14%
DAX Germany 2,748 3,965 44%

Stung by three successive years of decline and a possibility of a war with Iraq looming large, the US investors approached 2003 with utmost caution. But the apprehensions soon disappeared in thin air as the stock markets, which were languishing at lower levels on account of three years of battering, started to surge on the back of unique overlapping of both the fiscal as well as monetary incentives. While the Bush administration announced a US$ 350 bn tax cut package, the Fed lowered interest rates, making it reach its lowest levels in 45 years. These incentives allowed the consumers to flock back to the markets thus affecting a rise in demand. Thus, the surge in demand started reflecting in the topline as well as bottomline growth of the companies and as the companies started posting better quarterly results, investors started making a beeline for stocks, thus resulting in a broad based rally.

The fact that the stocks were trading at levels below their fundamental valuations also helped. As the time rolled by, encouraging news in the form of good GDP growth numbers, decrease in levels of unemployment and US victory in Iraq also helped fuel the rally. Although, bad news in the form of mutual fund scandals and threat of terrorist attacks did emerge, they proved to be minor blips and stood largely ignored by the stock markets.

Asian indices such as Japan's Nikkei and Hong Kong's Hang-Seng also had a favorable year. Efforts at depreciating the Japanese Yen vis--vis its American counterpart bore fruit as the country's exports to the US and also the Chinese markets remained robust. The fact that the US economy grew by a healthy 8.2% in the third quarter also helped. However, the high level of dud loans and deflationary situation prevailing in the Japanese markets remains a cause for concern for the country.

Indian benchmark index, the Sensex emerged as the second highest gainer in the world in 2003. When 32 out of the 36 meteorological divisions in the country received normal to excess rainfall, the growth in demand expectations of a financially restructured and cost competitive India Inc. finally saw the light of the day and the stock markets took off on anticipation of improved performance from Indian companies. Lack of sufficient growth stories elsewhere in the world also helped, as the country saw a never before inflow of funds into its equity markets, supposedly the handiwork of opportunistic FIIs. Low interest rates and abundance of funds with banks also helped in boosting demand.

The similar story of low interest rates, healthy fiscal condition and encouraging employment numbers helped the UK benchmark index, the FTSE to end 2003 on a high note.

Thus, while all the indices figured above have shown impressive gains in 2003, it would be nave to assume that these returns would continue from here to eternity. Although, investments in equity bear greater returns than other comparable investment avenues in the long run, the risks associated are also higher. Moreover, the magnitude of appreciation in stock values during 2003 is unlikely to repeat itself. For one, on account of the euphoria in the stock markets, the valuation for the current year seems to be already factored in and secondly, an increase in interest rates to stave off high inflation levels, especially in the US might hurt consumer demand. Therefore, investors need to be wary of the overheating in stock markets and tone down their expectations for 2004.


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