As the markets scale new highs, one wishes to know why and if it will sustain.
Ramesh Damani (below left), a well-known investor and member of the BSE exchange, feels there is severe under-ownership of equity and while there could be a correction after the elections, the markets will eventually recoup and move higher.Excerpts of a talk with Vishal Chhabria & Jitendra Kumar Gupta:
The current market rally seems driven more by liquidity than fundamentals. Could this disconnect lead to shocks?
All bull markets are driven by liquidity.
However, some evidence does suggest we are in the early stages of a new bull market.
There are a variety of reasons, which become obvious as the market progresses.
What the evidence suggests is that this is not liquidity or a sentiment-driven market. I believe a new bull market has begun. Such a market tends to go far higher than people anticipate.
What about the evidence?
The markets bottomed out around August-September 2013, when the rupee hit a low of around 70 against the dollar.
This had created panic. First, on the technical part, things like the market making new highs, its breadth and the advance-decline ratio are good evidence. Outstanding (yet to be settled) positions in the F&O (futures and options) segment are also very light. The economic recovery is not certain. There are big political and economic events coming up in the next few months. A new government will be sworn in and new policies will take shape.
However, there is fear that the US Federal Reserve (US Fed) will start increasing its rate.
But those are typical walls of worry that the market stands to climb. From the lows, the market has been moving up consistently, very sharply, another good indication.
There is leadership in the market, which started with (information) technology and pharma, and was routed through the defensives sectors. Mid-caps are now participating. Globally, indices like Dow Jones (DJIA) and others are doing well.
Most important, there is severe under-ownership of equity. The Indian public has been net sellers for so many years. This suggests that when the pendulum will swing the full circle, the public will come back to buy. When that happens, we could see a rapid rise in stock prices.
As there is less earnings visibility and valuations have gone up, why do you think there is room for more gains?
The markets tend to react six to eight months in advance. It is factoring in a new government, new policies will take place and that will spurt the investment cycle.
Consequent to that, an earnings upgrade will take place. There are sectors doing well. A broad recovery in earnings will probably come after the June quarter, as consumer confidence grows and the investment cycle kicks in. Markets tend to look at all these things well in advance. By the time the earnings come, we could be in for mid-year correction in India.
What we are suggesting to people is that this is as good a time as you had invested in 2003.
What if the election results are not favourable? What are the key risks in that case to the market and economy?
It depends on how far the market rallies up till May 16 (when the poll results are announced). We do not know how far the markets will travel over the next few weeks but I think there is some steam left. A range of outcomes are possible.
On the past two occasions, the markets slipped 10 per cent and were up 20 per cent after the elections.
So, of course, there will be volatility once the results are due. I think one will be able to gauge only a week prior to the election results.
While there could be a correction after the elections, the markets will eventually recoup and move higher.
Many stocks have already moved up higher from their lows and investors are feeling left out. How do you view this?
I strongly believe this is not the last leg of the rally; bull markets go a long way.
Those in the past (Harshad Mehta and the earlier one from 2003-04 to 2008) have seen the Sensex go up sixfold. No one knew where the top is.
It is more important to know where the bottom will be when the market falls because the bull market top will always surprise most analysts. Currently, we are not even at the cycle’s mid-point. There is a fundamental maxim in the market — either you get cheap prices or you get good news.
You would not get both at the same time. When the news is good, stock prices will be dearer and when the stocks are cheap, the news will not be so good. This is perhaps the best time to invest in stocks.
Which are your key favourites?
Sectors like technology and pharma should do well. In the non-traditional space, the ones I have been bullish over the couple of years are media and logistics. A lot of good things are happening in the media space as we are moving from analog to digitisation, which will create a lot of waves in terms of profit.
Logistics, as I think e-commerce has reached a tipping point in India. A lot of sectors will benefit because of the telecom revolution, which will benefit companies in the logistics space.
