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Why This Is A New Bull Cycle – And Why It Will Sustain
Corrections are short lived. Expansions are sustaining. And traditional metrics of valuation are no longer holding
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The fence sitters may not want to admit it, but time and again they have been missing the rallies. It’s not that their confidence is found wanting, it’s that they are looking for opportunistic entry points – and this ferocious bull market is not obliging (and by the way it is going, these obligatory moments are just not going to come).
But whether they care to admit it or not, this is not suckers rally, nor a technical rebound, nor ‘irrational exuberance’ but a rather structurally different bull market driven by strong and sustainable flows, recovery in earnings, and reforms.
The key word here is ‘sustainable.’
The stock market has been ‘receiving’ funds of Rs 4200 crore approximately for the last some months and over the next two years, this figure is only going to increase. Approximately Rs 6000 crore is expected every month. In dollar terms, that’s $1 billion – not tiny by any standards. At one point, the Indian market received $1-2 billion a year from foreign investors. And now locals are putting that money in a month.
The real picture is that if fund flows are strong, bull markets are sustained. Years ago a fund manager told yours sincerely (actually Nilesh Shah) that to grow a plant, you need water. Metaphorically, water is cash flowing into the market.
These flows also enhance and expand valuations. The PEs or the price that we are will to pay for profits and growth has been at about 15 times historically. With the new and rising inflows, the market is going to make a new base of PE at about 18-19 times earnings.
In market parlance, this re-rating is justified – and a re-rating normally happens when there is a structural shift either in business prospects or earnings growth.
To be sure, there is a structural shift in the Indian markets – for five reasons.
One, India’s strong domestic inflows into stocks.
Two, a stronger and well-behaved rupee due to lower current account deficits will only shore up foreign investor confidence.
Three, reforms like the GST will only add tremendous savings in the economy that can be channelized into more productive uses.
Four, technically we have broken out of the 9000 resistance ferociously, and now that will have to act as support (unless taken out equally ferociously, which is very unlikely and can happen only because of an external event and will not be market driven).
Five, globally, there will be issues, but they are increasingly being dealt with positive outcomes.
By many measures, the market has thrown out all logic for the fence sitters out of the window. If you look at the last week’s trading patterns, it seemed to suggest that the markets will correct and prices will drop down to 8700 levels. But the correction has been shallow.
In fact, the market has bounced nearly 290 points (0.99 per cent) taking the markets back to comfortably higher levels from the 9000 levels. The Dow Jones, too, surged 219 points (1.07 per cent) the last evening even as global confidence is waltzing back.
So if you have been on the fence, it’s time to jump into the playing ground. If you have been booking profits, you may want to re-deploy it into undervalued companies for the long haul. This market has legs needed for it to sustain in the long run with short corrections and long expansions.