“Abki Baar Sensex Pachaas Hajaar”?

In the last few weeks, since Rexit (Raghuram Rajan’s exit as RBI governor) and Brexit happened, the market has demonstrated incredible strength. The bull market is in full form, conquering the walls of worry that we call Rexit, Brexit and perhaps even the earnings season. An earnings rebound in the next few quarters was on the cards, and I think this is the first quarter when the markets have upheld the litmus test.

The first thing we tend to look at is the overall direction of the market. I think the market made a very important bottom in August 2013, about six to eight months before the Modi government was actually sworn in, when the rupee was at 70/$ and P Chidambaram and the finance ministry went into a panic. The market hit a bottom then. Since then, it has been three years into probably a much longer bull market, and every indication is that the bull market has a long way to go.

We are opening a Pandora’s box – the different problems that the markets can face over the next six months – FOMC, China devaluation, global terrorism. But my view is that the market is up year-to-date and is very close to its all-time highs despite a very weak January-February, despite Rexit, despite Brexit. The bull market is showing that it can climb the walls of worry. I think that one key global issue that would worry the market is if the FOMC (Federal Open Market Committee) decides to raise rates. The markets can deal with any subject except rate hikes, because that will change the valuation of all equities across the world. The market is now on steroids, it wants low interest rates. So if that happens – it’s unlikely to happen this year – then the market would have to grapple with higher interest rates. That would be the key risk, along with of course, the continuing bout of terrorism.

Well, Menaka if I can use the meme of the times, and I use this with a sense of humour – when I was asked this at a conference, ‘where is the Sensex headed,’ I said, to quote our prime minister, Abki baar Sensex pachaas hajaar. Let’s start with that round number, let us hope we get there. I am hopeful but of course do not put your money where my mouth is.

The trajectory of bull markets suggest that the index typically doubles before it peters out. For example, let’s take the 1992 bull market that culminated at 4,500 but what people don’t remember that it started at 800. Or the 2003 bull market that started at 3,000 and finished at 20,000. Readers can do the math. Bull markets have a long way to go in terms of magnitude. So I think we will be surprised by what develops.

You know it is actually too far away to be crystal ball gazing, we’ll deal with it when it happens. Whether the global economy is weak or strong then, what will oil prices be then, we will have to decide at that time. But from the past experiences in the last few years, it seems the market is ready to face almost anything. What happened to the CAC the day terrorists attacks happened in France? It closed higher. Markets can go through Rexit, Brexit, terrorist strikes, almost anything it’s able to handle and take in stride. The one thing I find the market does not have the ability to handle is a significantly higher FOMC rate. So if the Federal Reserve starts signalling they are going to aggressively raise rates now because inflation is hurting the economy or because interest rates are too low, that would be a warning sign that the bull market may be coming to an end. As of now, the guidance is that the next six months we are not going to see any hike. So why pray for an early death? Let’s watch and wait.

The public financial sector have always been a cause for concern to market men who have been studying their balance sheets. It makes little sense to me that, say six months ago, these companies were paying 30 percent tax rate and a high dividend rate but not making provisions. So basically, they were paying out profits and tax on money they didn’t have. Now that they have recognised the reality and taken a write-off these stocks have been in a depression. Are they cheap enough to buy? Not until I see a cultural change in these PSUs. I think we need a cultural change not necessarily just a balance sheet change. We need to make sure this problem does not recur. So to summarise, I probably would not be looking at them at this point.

Well, with the IT sector I have a nuanced view. It’s been a long-time favourite of bulls on Dalal Street. We have all cut our teeth with companies like Infosys, Wipro, TCS, that have gone up 50 times, 100 times and have made us a lot of money. So we are all very enthralled by those companies and they continue to do well. But those companies pioneered a service-led, business-oriented model in India, which essentially means you export services to the west, bill in rupees, collect in dollars and you make a margin. And because the rupee depreciated and volumes were growing you kept doing well. That model maybe under threat due to automation, competition and just due to the fact that there is a slowdown in global IT spends.

There have been a plethora of offerings in the recent past. Polaris spun off a nice looking product company which I own. There are a lot of others, few companies have come out with an IPO recently. So it requires little bit of digging. The road to riches is never easy. There is risk in these stocks because they are unproven business models yet. We don’t know if India can legally sell, in the domestic market, a lot of licenses or are they all going to be pirated software. So time will tell. But I am fairly excited about these companies because they address very good opportunities. For example, the Aadhaar database was built by an Indian company and that’s a huge technological achievement. They have 100 crore people on the database. Antivirus software companies are showing up in India. So that makes me excited as a technology investor.

You know, sometimes you need direction from New Delhi and I think we are getting it. If you look at how the government is going about the PSUs, using them for investments, some of the stocks have appreciated handsomely. Also they are starting on the strategic disinvestment roadmap, so they are doing a good job there. Now the big bet that the market will have to make is - Indian manufacturing at 20-25 percent of GDP, can it become greater than that? And that is why the Prime Minister launched his Make in India scheme.

Absolutely. We needed a good monsoon, otherwise the bull market would have derailed very badly. I think there is a consumption boom going on in this country hidden behind the numbers. In terms of sales, at say, department stores, tractor sales… I think there is a very strong consumption boom going on in this country which will show up in the next few quarter of earnings. So I remain fairly bullish on the FMCG space.

I think infrastructure is recovering. I think capital goods, some of the companies I follow, are not showing anything in the balance sheet yet that indicates they are recovering. But I think infrastructure, in terms of defence, roads, I think they are well on the way to recovery.

I really avoid those companies, I don’t have much knowledge of metal companies. But for a sector that is looking at becoming a darling of the market in the next six months, it’s already done very well. I think there is still some steam left on the upside - probably in the oil marketing companies. I think they are phenomenal companies that have basically monopolistic businesses. India is now the largest volume importer of oil in the world. Prices are deregulated, the government has announced bonus and liberal dividends for these companies. So I think they are catching market fancy and the rally should probably go from single digit PEs (price/earnings ratio) to double digit over the next few years.