Are we in a structural bull market?

Reference : “Market at New high… What Next?” – October 30, 2013

In our earlier blog we clearly mentioned that there is huge upside to the market. We also believed that at every higher level consensus in the market will emerge. As we speak we all have started believing that “Ache Din Aane Wale Hain!!!”. That cheerful sentiment can be felt in the market as well.

In the middle of the gloom and doom in August 2013, we all debated endlessly about the political future of India. Market was hesitant too in taking decisive position before elections. We all debated whether once again we may end up with a fractured mandate at the centre. 

On February 14, 2014 things started turning around. Market started moving up in anticipation of a strong mandate. Out of favour stocks and sectors started outperforming broader markets. In just a few months the Sensex moved from 20000 to 24000 before election results. May 16, 2014 onwards which was election result day clearly took the market into a different orbit.

It’s common sense that someone investing today cannot benefit from yesterday’s move. Lot of good things have already got factored into the price by then. The market cap of India is already up from 60 Lac crores to 90 Lac crores which is a 50% growth in investor wealth in a matter of months. This explosive move in the market was because of very high level of underinvestment and lot of pessimism.

A strong consensus is building that we will start seeing improvement in growth rate and fundamentals. This, the experts say, will help us get high valuations and profits for corporates. In short consensus on the street is that we are in a structural bull market but we have a very different take on the subject.

In our opinion a few basic things are required to start a structural bull market – low inflation, low interest rate, high liquidity and low confidence. We are far off from low inflation and low interest rates. Currently we are seeing some level of comfortable liquidity because of strong dollar flows. Confidence has gone up but was at rock bottom a few months back which created a backdrop for strong rise in equities.

If this is not a structural bull market then what next? How will asset classes fare in this new environment?

Equities – In our opinion lot of good news is in the price. We have seen people aggressively allocating money to equities which indicates that risk perception is reducing amongst people at large. Retail participation in daily volume on both the exchanges have gone up and we are also expecting large supply of equities hitting the market and taking advantage of this bullish sentiment.  In this new reality we can only see flattish market or gradual upward or downward move in the immediate term. Market will wait for inflation and interest rates to fall to create a strong structural base. In short we believe we may face an extremely stock specific market with broader indices trading in a tight range.

The risk to this thesis is that world liquidity can get into Indian markets and create an equity market bubble.

Debt – In our opinion a lot of bad news is in price. People at large are worried about the inflation scenario. Participants are exiting long term debt funds and today it is the most hated asset class. As per our observation all inflation levers are cooling off. People are highly invested at the short end of maturity while long duration market is extremely light. This is the perfect scenario for investors to get a huge upside.

The risk to this thesis is that if global liquidity gets into the Indian market it’ll create an inflationary environment as the RBI will strongly intervene to keep currency at 60.

To summarize most of us are extremely conservative on debt side by owning short end of maturity and extremely aggressive on equities by investing in high beta trade. We would urge investors to just flip the trade.