We are in a bear market, with prices falling rapidly. Yet, we must remember that stock prices will never become zero. There is intrinsic value in many stocks. Many of these companies create value, earn money, grow. Unfortunately, there is a disconnect between stock market prices and business values. A business can prosper while the market can languish. Also, each new bull market brings out a new set of favorites.
It is possible that the markets may stop falling rapidly. The next decline may be slower. World over, markets can go into a trading range that may last for many years. History tells us that bear markets do not vanish in a minute.
In 1985 a bull market started in India, after the first Rajiv Gandhi - V P Singh budget cut income tax to 50% (from 66%). Euphoria took over the market. After one year, the market topped out in 1986. The bear move that started in 1986 bottomed out in 1988. The 1988 - 1992 bull market saw the sensex go up from 400 to 4500, a gain of almost 1000% in five years.
Now comes the interesting part. This extraordinary bull market peaked out in 1992. The market then went into a trading range for 10 years, finally emerging in 2004 to make new highs.
The 2003 - 2008 bull market saw the Sensex go up from 2800 in 2003 to 21200 in 2008, a gain of 657% in four and half years.
After such stunning bull moves, the market needs rest. The excesses of the bull market have to be exorcised.
As the market will bottom out, I am looking at a new bull market based on these themes discussed below. This is a rough idea, it will probably change many times.
1. Greed Kills.
Capitalism turns into killing fields when Greed overcomes human nature. This happens when financial managers are given control over the country. Productive efforts are ignored by financial wizards who only understand the language of money.
The last few years saw this greed in full flow. The wheel is likely to turn full circle. Businesses are being nationalized in America and Europe. The process of privatisation will virtually end. The reverse (nationalisation) will begin.
Suggestion: Avoid companies where greed may overcome the management. Avoid private sector financial services companies, private sector banks. Invest in public sector banks, semi public sector financial institutions (like IDBI ).
2. Technology changes the nature of business.
I feel that there will be a big shakeout in brokerages. The business of broking as we know it will vanish. As an example, the NSE has introduced software which allows retail clients to directly log into the NSE Servers and trade. Soon enough, middle level full services brokers will become redundant. Large broker bankers (ICICI, HDFC etc..) or small boutique brokerages will survive.
Do not invest in brokerage equities.
There will be companies where technology will bring benefits. These will be manufacturing companies. For the past few years, services (mainly financial services) have led the market. Now, technologically drivern manufacturers may lead. This is all for the better, since the manufacturers actually add value.
The underlying theme is: which companies take advantage of technology ? Two beaten down metal stocks, Tata Steel & Sterlite come to mind. So does Maruti. There will be many more.
3. Natural Resources
Natural resources are in short supply. Companies that own such resources should prosper, no matter what the short term outlook may be. Examples: ONGC, Cairn, Neyvelli, Sesa Goa, GMDC.
4. Public Sector is IN.
One advantage of the public sector is that it cannot be nationalised. (sorry about that!). A sea change has taken place in the structure of these businesses. They are probably better managed than most private sector units.