Market at
New High… What Next?
Reference
: “Market Preparing Itself To Scale New High” - December 10, 2012
From
December 2012 till date market has made multiple attempts to make new high in
the midst of very negative news flows. As we speak we have crossed 21000 on
Sensex after a lot of toil, frustration and disbelief.
There
were two big black swan events in the market which spooked sentiment on the
street. First was the sharp depreciation in rupee and second the reversal of
interest rate cycle. In Budget Blog we clearly mentioned about risk on both
fronts. After both these events we started believing that the worst is in the
price and market will move upward. We are extremely happy with our investors
behavior who believed in us and stayed the course against common wisdom.
Now
the big question in all our minds is what next? We would like to share our
perspective on the market…
1.
Valuations
– in our opinion market is extremely cheap. Earnings have not grown in the last
5 years due to currency fluctuation, commodity price fluctuation and government
policy interventions. Most of the companies have been resilient in this market
and mindfully allocating capital. In every fall weak companies tend to lose
competitive advantage and business shifts to stronger players. This will help
some of the stronger companies to take advantage of up cycle where earnings
tend to grow faster than economic growth because of better utilization of
capacity. Foreign investors have clearly recognised this opportunity and
invested heavily in the market at the cost of domestic investors who have
largely stayed out.
2.
Sentiment
– on this front we have hit rock bottom. Majority of domestic investors are in
denial about the recent rise and are highly underinvested in equities. In the
last 5 years of savings in India a major bulk has gone to real assets like gold
and real estate with the allocation to equities having been reduced
dramatically. In any asset class when it is hated the most, it ends up giving a
big move. In our opinion equities at new high will make people at large look at
it and create more consensus towards it.
3.
Technical
– smart investors have made big investments in the market. With all the bad
news we have witnessed huge selling across the board which is getting absorbed
by such investors. Once selling becomes light, market will find it easy to move
upwards. Market has consolidated beautifully over the last 6 years. On every
incremental good news market will start making higher top and higher bottom.
Also conviction amongst people will increase and participation will increase.
4.
Long
term story – in the bull market of 2003-2007, we all believed that equity is
the best asset class to beat inflation and in the long term equities tend to
outperform all asset classes. This theory still remains valid but the
general belief in it has vanished. From 1978 to 2013 markets have multiplied
210 times inspite of multiple elections, wars, natural calamities, bad
governance, etc. The next 30 years will definitely be better than the last 30
because of the rising aspirations of every Indian. There is no better way to
play this story other than equities.
We would request all of you to look
at your allocation and correct your underweight position on equities.
Finally I would like share this
video with you… Did you know -
