The phenomenal rise in Sensex in the just concluded financial year raises expectations of another remarkable performance this year as well, with some die-hard equity bulls predicting it to even touch the magical 21,000 mark. Sounds far-fetched? Maybe really not, as bulls pin hope on solid corporate earnings in Q4 2010 and sustained economic recovery. However, factors such as hardening interest rates, a stubborn inflation and sovereign debt crisis à la Greece can play spoilsport. Besides, valuations, which look a bit overstretched, too may put a spanner in the further march of the bulls.

Nearly a year ago, in April 2009, when Sensex reversed its nearly two quarters long losing streak, triggered in the wake of the worldwide financial meltdown that unfolded in October 2008, not many would have foreseen such a remarkable bounce back, from 8,937, touched on November 18, 2008, to breeze past 17,527, as on March 31, 2010. Nonetheless, domestic stocks made a strong recovery towards the beginning of April 2009 to deliver eye-popping returns during the recently concluded fiscal year. The benchmark Sensex turned in a scintillating return of 81% while NSE Nifty followed closely with an equally impressive return of 76%, during the said fiscal. Such kind of returns were simply unthinkable after the global financial crisis which sent the financial markets across the globe into a tizzy, threatening to further spoil the show for the bulls. However, backed by factors such as increased liquidity, notably from Foreign Institutional Investors (FIIs) who pumped in a record $17.5 bn in the calendar year 2009 as against a withdrawal of nearly $12 bn in 2008, amidst signs of rising risk appetite on the part of investors, low interest rates, moderate inflation, and revival in corporate earnings, domestic equities not only regained their winning streak, but also propelled key market indices to scale new highs. A major characteristic of the rally was that it had been a broad-based one with almost all the sectors participating in it.

Now, bolstered by the robust rebounce, many market analysts predict an even bigger and bolder uptrend in the benchmark index to 21k (some even expect it to zoom past 22k), driven primarily by strong economic growth back home and an early revival in the fortunes of the services sector, notably the $60 bn domestic IT industry whose contribution to the employment creation and GDP growth is crucial. However, the benchmark index has remained range-bound for some time now in the absence of any vital global or domestic clues. And though corporate earnings season has just kick-started with the IT bellwether Infosys announcing its Q4'10 results on April 12, it has literally failed to ignite the market senses with the Sensex closing the day in red. Even in the couple of trading seasons that followed thereafter, which saw an across-the-board jump in the prices of IT stocks, a section of analysts ruled out sustainability of the rally fearing that a combination of rising rupee and increased wage costs could pinch the margins of the companies hard as most of them earn more than 50% of their revenues from abroad. Inevitability of a tightening credit policy looks more certain than ever now. Further, on the global front, risks of sovereign defaults too appear to be real, especially after the Greece debt crisis. And not the least, valuations at large look overstretched. Amidst all these, the big question is: Will the market be able to sustain this winning momentum, going ahead?

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