Tuesday, October 7, 2008

The Next Bull Market will be Different

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.


piyush modi said...

Would just like to point out a couple of things. The 88-92, move was followed on the top of a decent move earlier. Cumulative, the index moved from 100 as of its base year in 1979 to 4500, a move of 45 times in 13 odd years.

Whereas this move has been after a sideways phase of over 10 years as you said.

Apart from this, fundamentally, there was a huge difference in valuations. In 1992, the index itself was trading at PE close to 35-40 times, this time we were near to 25, which was about 1.7 standard deviations away from mean (not huge). 1992 was about 4times away from mean.

Thus, though every after every bull run, mkts require time to catch their breath, hopefully, this time wont be 10 yrs long, atleast based on india fundamentals. How long will US fundamentals drive indian mkts?
Once risk aversion subsides, dont mkts like India become more attractive due to the much better growth prospects & attractive valuations as we have already taken huge knockdowns, where US has gone down by just 30 odd percent, not much when you have the crisis of the century.

piyush modi said...

Prices fall in a bear mkt, & just like they dont have a top in bull mkts, they dont have a bottom. But are not falls of 90% enough ? I read somewhere about the 89% retracement levels. Is this of any significance? After all, after a 90% correction, all the exuberance must have been out of the stock by now?

Sandip said...


I am a regular reader of yr blog since Jan-08. Actually i entered the stock market at that time only. Fortunately or unfortunately this has exposed me to the worst and difficult part of the market in best possible way, a lesson that every investor should learn in the begining itself, as I am learning.

One of the theme that I feel may form a part of forth-coming bull market is FOCUSED DOMESTIC CONSUMPTION STORY. Companies having nil to very negligible international exposure with a very strong and continiously expanding presence in domestic market. This is just a reflection of aversion of global markets in view of globally spread of credit crunch.

Another space that may lead the coming bull run may be SECTORS MINIMALLY AFFECTED BY INFLATION. As the FM has also made it clearin its statement yestarday that currently liquidity is the top priority rather that inflation control.

Your reciprocal comments will be big boon for small investors like me.

udaymehta5 said...

1992 Harshad Mehta teji
+ 8
2000 Ketan Parekh Teji
+ 8
2008 Global Teji / FII
+ 8
2016 Next probable teji