Ramesh Damani, Member of the Bombay Stock Exchange (BSE) feels that the markets will spend some time at the higher end of the range as bear confidence is at a historic high. However, possibility of the market hitting new lows cannot be ruled out, he rues. "But this won’t happen in a hurry,” Damani said. The Sensex, according to him, will eventually break 8,000.
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Talking about the impact elections might have on the market, Damani said, the markets could remain volatile during elections and he expects uncertainty two weeks prior and post elections.
However, Damani does not see a bull market for the next five years and expects contraction of economic activity.
Q: What have you made of the last few weeks, where we have had a fairly spectacular and sharp 25% rally?
A: The bad news, of course, is that, it is a bear market rally. The good news is that you can view the market from many prisms; you can view it from earnings, expectations and de-coupling theory. However, if you view it purely from the angle of sentiment, I have never seen the bears more confident in the 25 years that I have been watching the markets. The way they are talking is like Armageddon-2 is going to happen and it is going to happen tomorrow. The market is obliged in that direction. Thus, if I have to make a call, I will say that the market is not going to go back to the bottom of this trading range in a hurry. It is going to spend some time at the higher end of the trading range, maybe even take out 10,500. I just think the confidence in the bears is so supreme that the market will test them also.
Q: Eventually, after the scare that you are predicting for the bears, do you think it will still remain a bear market, in which case the recent lows of 2,500 Nifty still stands under threat of a retest or a breach, or do you think we have passed that fear?
A: Unfortunately no. If you go back and study the evidence of any great bull market in the history of the world, it really makes a bottom in the first year of its lows. There is a very long and very painful period ahead of us. I don’t want to play light on those prospects, because we are still in a bear market and this has also the symptoms of a classic bear market rally, only the small leadership advancing, absolutely giving you no time to think.
Bear markets are very painful, and the market will eventually break the 8,000 barrier. There is a very good chance that it would test and break the lows. But I don’t think it is going to happen in the next one to three months.
Q: You do see it happening at some time in 2009. What makes you less willing to subscribe to the theory that perhaps equity markets, or Indian markets, have seen the worst in terms of a bottom for this year?
A: The theory that the bulls advance to all is that India is different, and that we have a great domestic economy growing—our GDP growth would be somewhere north of 5%. All that is probably true. The problem is that markets don’t change—they are never different.
If you go back and study any of the great bull markets in history, whether it is Japan or the US bull markets in 1968, or Thailand or Taiwan, once that bull market ends, the forces that propelled it higher, end. There is a huge time for the market to regain its old highs.
When I am talking about a new bull market beginning, we have to take out 21,000 to take that seriously. And, that might not happen for another five years, to be optimistic, because that is just the kind of pain that the markets inflict. There will be a whole generation of people who will forget about investing will have to get to that kind of sentiment level.
When this rally happened over the last week, the bulls were supremely confident that the worst was over; the worst is in the prices. On Monday, it was the bears—the market will tend to make both of them complacent before it moves out in either direction.
But if you look at the historical evidence, it is absolutely clear-cut. In fact, there is no dispute in my mind that we are in a bear market and this is a bear market rally. Ultimately, the market will test its lows and break it. It is just not going to do it in a hurry as the bears think.
Q: If you were to look at the market through the prism of economic data, how are you feeling about that? The catalyst, for this bear market rally we have had, was that maybe things were coming into place in the financials maybe the data wasn’t going to be as bad as what we live through in 2008?
A: The data can be looked at so many different ways—You can say that auto sales were up so that is a good indicator of cyclical recovery, so yes the bad news is behind us or the cement prices are up that is a good leading indicator, so yes the economic recovery is ahead of us. But, I can give you equal data to argue the bearish point of view, like you always heard about the first world and the second world and the third world—the first world being of course the nuclear super powers or rich and Western industrialised economies, but you don’t have to look at them any more. You have a country like Britain, which is basically tittering on the edge of insolvency. Therefore, the whole world, in terms of those analyses, looked pretty grim. You are going to have an economic contraction in the world back-to-back the worse economic contraction in the US, liquidity markets have rallied what a lot of analysts are pointing out is that credit markets are still pricing in a very high risk of defaults. Hence, the global economic picture means that the global economy is going to slowdown and that is generally not good for stock markets and besides even if the economy does well, the markets don’t have to do well. There is no law that says if the gross domestic product (GDP) is 6%, the market will perform at 12% or some number like that. Hence, it is wishful thinking to think that the market can go back to 21,000 in one or two years. I would read that as a very small probability of that happening.
Q: So where do you see upsides capped for 2009? What is that point at which the bears start throwing in the towel and say maybe things are changing, and we should not be so complacent about the downside risk in the market, and the point where the bulls start saying that things have turned once again for the mend? Is it 10,000, 11,000 or 12,000, what is the upper limit in your eyes?
A: A few months ago, I would have said 10,500. That was the day the Satyam debacle broke. It was around 10,500. My sense is that the market will take it out and go up to say between a broadband of about 11,500-12,500. If you remember, 12,700 represents the peak it reached in May 2006, before the market had one of those most ferocious bull market falls. So, I would say 12,700, or spikes around that region, would be the higher end of the range. It may never get there. But if it crossed 12,700 in a very decisive manner, you would certainly have to look and say that maybe your analysis needs to be rethought out.
Q: How cautious are you about the outcome of the elections or what gets thrown up in terms of a coalition combination? How material do you think it is for the market’s life?
A: I read a great quote from “The White Tiger”. It says, there are three kinds of fevers to worry about in India – cholera fever, typhoid fever and election fever. And probably, the election fever is the worst.
It is hard to say. But the good news is that the Indian democracy and markets are fairly mature. They will be very volatile around the elections. But ultimately, the market figures out and keeps moving in the direction that it has to.
So, yes, there would be a lot of uncertainty, two weeks before and after the election. But the Indian democracy over a 50-year period, and Indian markets over a 30-year period, have shown themselves to be very resilient. This is a good market with a lot of depth in there. Hence, the market would respond to the kind of cues that we get. If we get a Third Front government, the market would tend to be weak. If you see the Congress or BJP seem within eyeshot of having a majority, the market would respect and react positively to that. I am thrilled to hear the Congress plan and Dr Manmohan Singh saying that he is going to disinvest all the PSUs so that the Indian public can have ownership of the PSUs. That will bring accountability to the sector and give a great opportunity for Indian investors to buy some great companies at what would be very good valuations.
Q: How are you reading the global situation, since you track that closely, this whole optimism in the last few weeks has stemmed from there—first the financial sector then some bits of positive news came out from the US and that unleashed a bit of money into emerging markets (EMs) as well?
Do you think it is a durable turnaround that you are beginning to see out there in the West or it is just a few positive data points which are leading no more than a bear market rally there as well?
A: On January 20, when President Obama was inaugurated, the Dow—which is the oldest, most matured, most widely followed market in the history of Western civilization—was at 9,000. Within the next six weeks, it went to 6,400 - but 2,500 points knock in the Dow after it had fallen 40%, it was clearly vastly oversold. The market gave a good 50% retracement.
If you look back and say what is going to happen in the futures, I don’t see any good economic news lasting and this is going to be a jobless recovery taking place—unemployment is going to trending higher, banks are not going to be in a position to lend; whether they are banks in India, banks in Western, they are all putting the money into T-bills rather than lending out, there is going to be an economic contraction of activity. This whole model that the Western world has built up on terms of easy credit availability that everything is priced by markets, probably will recheck and the first signpost of that will be the G-20 summit that is taking place in London in early April. However, I think, the global economy has enormous challenges and the easy money policy that we followed for the last twenty years has come to an end. Hence, businesses will have to earn a return on capital and that takes a very tough winning away process.
Q: What are you doing right now in the market? You have always been a long-term investor, you like to pick good businesses at reasonable value and many non-index largecaps or midcaps above USD 100 million marketcap are trading at 10% off their peak value in just about 12 months time. Is it time to go out hunting or do you think it will take a very long time for any of these stocks to come back in a meaningful way?
A: I have been hunting, but it has been a very disappointing process. Even in this rally, the midcaps have virtually not moved at all and that is because the investing public is not back in there. They have been so burnt—it is the trading communities, the hedge funds, the domestic institutions and they always tend to buy the 50-100 most liquid stocks. Thus, the B group stocks are still available, still great companies at great prices but we are not seeing any – despite this whole 20% rally, the portfolio of midcap stocks that you might own have barely budged.
But my suggestion to a few investors is that eventually new bull market will start, a lot of the bears also have this feeling that this time it is different and that we are going to rewrite the rules of investment that investing is never going to be the same again and I will respectfully tell them to remember that in the stock market, nothing is different, everything keeps changing all the time but it comes back to the same principles.
Whenever the next bull market starts, it might be years away, these stocks will tend to move before that bull market starts. I think the two sectors which I find vastly unpopular this time are airline sector and oil marketing companies. From Warren Buffet down to the clerk in my office, everyone knows not to invest in airline stocks, the balance sheets are hugely challenged but at some price the bottom of this bear market Jet was at Rs 120 so implied marketcap of about 800 crore which is ridiculous for an airline running 20 years in India. I own a small amount of Jet for disclosure purposes, so I would buy that. Also, oil-marketing companies are extremely unpopular but they offer good, solid businesses that in a more uncertain time would rebound. You want to buy things like Novartis, Ingersoll, which is doing buyback, you can fairly easily predict which companies are going to do this buyback privatisation in the next one to two years. There are some good returns to be made for that and for the rest you have to grin and bear it, there is nothing that says that you allow 20% return every year in the stock market.
Q: What about commodities in that case? They have been a large feeder of this rally that we have seen up to 3,100. Any thoughts on whether you would want to dip your feet into anything over there now?
A: In that case, I’d always wear yellow glasses. The only commodity I am actually really bullish upon is gold. I think it will be a big gainer based on the global economic environment. People tend to think that gold will do well only in an inflationary environment. However, if you read history, it does well in a deflationary environment too, because one of the properties of gold is that it acts as a store of value.
Given the fact that people had a lot of disrespect for paper currencies, for fiat currencies and for stock markets, I think over a period of time, people will shift to gold. It is now in a trading range, consolidating at the higher end. At some point, it would perhaps breakout over USD 1,000-1,030 per ounce and then a new bull market will start in gold. If it does start, it is going to be a very vicious bull market.
Q: Just because of the momentum we had last week, for a lot of people, it seemed like this was going to be the big bear market rally where we would conquer 3,100, do a lot more by way of price appreciation. Do you see that as a likely prospect over the next couple of weeks?
A: I would think so, and I am basing this purely on sentiment. I think the results really—markets will be volatile. However, the market is not going to go down barely because of a bad set of results. I think it is just the sheer sentiment I am finding in bears. Like I told you, they are expecting Armageddon-2 to happen and happen tomorrow.
The market may eventually get where they are saying it would get. I just don’t see that happening over the next month. Therefore, I think, if I was a bear, I would be circumspect about selling. I would not be a very aggressive seller at these points. Sometimes, even in a bear market, you can have a very strong bull market that can extend in duration for a period of time.
My thought process, after looking at the players and listening to everybody, is that we are in such a phase that the market might actually be healthy for the next few weeks and months.
Q: Real estate—a sector that you have never been in love with. Has enough damage been done for you to reconsider your stance on the sector or not quite yet?
A: I think so. I’ve never been in love with it; it’s only that it has just been priced atrociously in the market. I think values are coming down there. Avoid the companies that are leveraged. But, if you can find within that, companies that have good business models, housing at the Rs 20-40 lakh level, I think there are stocks within that sector. I would certainly be a buyer out there.
All I am saying is that, a bear market doesn’t necessarily mean the end of the world. I think there are great opportunities for stock-pickers to buy stocks—to build a portfolio of the future. I don’t like to believe anyone who says ‘this time it is different’. In a bull market they said, this time it is different, India would never go down, India will decouple completely. Now, the bears are saying this in a bear market. I think go back to basics, do your homework, find the principles. The principles of investing don’t change. If they change, they won’t be principles.
Disclosure:
I have a vested interest in whatever we are discussing.
ICICI Prudential Mutual Fund has announced the launch of the ICICI Prudential Target Returns Fund, an open ended diversified equity fund on 15 April 2009. The new issue will be open for the subscription till 14 May 2009. The NFO price for the fund is Rs 10 per unit.
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