What do you make of the market construct?
I have to be cautious on the market as I have been most of this year and remember that we will not really settle down till the US market settles down and even yesterday, Nasdaq was down one and a quarter percent. If one looks at the previous big falls in the US and may be the rest of the world, it normally ends with either the Federal Reserve coming in a big way or government coming in or somebody coming in to support in some sense. All that is not only missing but they are on the other side right now and the valuations have to become much cheaper. The US market has not settled down and I do not think the Indian market can settle down either.
So you stay absolutely cautious but we have also seen a fatigue for blue chips. It is looking like there is an upswing in the broader markets?
From January onwards, even in the US, the problem started with the fact that the inflation number was higher than expected and therefore interest rates had to go up. Therefore the valuation of the companies in India similarly and in the US will be reduced. But what has happened in recent weeks is that the earnings themselves are also not coming on par. So, one fact was that the valuation will be lower because the interest rates are higher than where the real value comes later or from years of growth. Those will be affected simply because the discount factor is increasing.
But in the last few weeks, neither in the US nor in India, even the regular results coming out are not as was expected before. For some of the stocks which are down a lot in the US, it has purely to do with the fact that one now does not want high valuation companies, but for many others it has been because the results have been poorer than expected.
Similarly in India, the banks, the tech companies have barely met their expectations. We remain bullish in the sense that we are invested in the market but on the margin, I do not want to celebrate every 0.5% move in the market because I think the whole movement is not going to end in a week or two. It might end after two-three months when the US market has fallen a little bit more or a lot more.
But if it does not fall, then we have to see the actual withdrawal of liquidity by the Federal Reserve being pushed to the limit. Even though many of these things were predictable not many years ago, a few weeks and months ago they still want to push it to the end. Therefore I do not believe any more that they have discounted or know how to handle the withdrawal of liquidity and stuff like that.
In India the story is much simpler. One has to be slightly cautious because every evening these guys come and sell Rs 3,000 crore of stocks other than maybe yesterday, when they sold only Rs 1,700 crore. We cannot pay Rs 3000 crore everyday if it keeps coming and when for a few days it does not, we will say one problem is over but right now, it is not fully over.
Has the bear market started or is this a bull market correction? If this is a bull market correction, then perhaps we will have to just wait it out?
This is a bear market, not a correction. Bear market has happened in many stocks. It would be best if we could say that it is a bear market which will get over in a few months because bear markets normally do not fall 50%. It was only in 2008 that they fell 50-60%. So a bear market is where one can see 25-30% correction and in some sense, in India also, many stocks have fallen 25-30% or more.
So instead of calling it a correction in a bull market, it is best if we say it is a bear market and it will end in a few months because the duration of the bear market does not go on for years. Even if we look at 2008, we can say that it started in January 2008 but ended in March 2009, but actually, if one had been a little bit protected, then one would have mostly escaped.
We are not escaping by saying that we are protected. What I mean is the duration of the real fall is only seven-eight months. Even in 2000, one can say that it started in March-April of 2000 and then nearly played out by December. But then next year when it was recovering, we had another problem, which was September 11. Therefore, if one looks at CY2011 numbers, they look very bad but that was because there were two events back to back. So do not call it a correction in a bull market, call it a bear market which is about to end in a few months.
I am a compulsive bull and let me argue that every bad news is perhaps in the price – be it crude, Fed or the war. Don’t you think markets are already factoring in all the bad news?
That is the normal thing. I am a bull and I am 90% invested. The thing is that in the long run, wars also do not matter. If you look at the World Wars, the Iraq war and others and look at it on a chart right now, the war does not matter.
But if we are in the middle of a war does war matter or not? We say and many fund managers say that we do not predict inflation, we do not know about the macro economy but if the inflation number is high right now and the Federal Reserve or the Indian RBI has just surprised you in a panic, then can we say that for one or two months let us just see what it is instead of saying we do not know about these things?
We do not know whether it was discounted or not but just a week ago, there was a panic surprise rate hike in India. So all I am saying is we are also not bearish, bearish in any way. All I am saying is let us not go with the story that in the long run this happens, in the long run that happens because the long run is in the long run. Right now we are in the short run. It is like saying that we cannot predict whether some individual will have an accident or not, but we can still tell him to not stand in the middle of the road when the traffic is coming!
We may say that we cannot predict a war, we cannot predict some episodes of bad things in hindsight but in the middle of that, one can be a little bit cautious and not say every day that everything is discounted. First of all, I do not think anything is discounted simply because for 25 years I have been saying that India is a beneficiary of the demographics of the young population and I am still saying it. How come we did not discount this? Nobody discounts anything.
For 25 or maybe 100 years, we are saying that the US is a great system, it encourages innovation, it encourages companies to grow and companies to die. It is very flexible in its even rewards, failures and gives a second chance. Why has this not been discounted?
When will this bear market get over? What will happen and where the leadership emerge?
My thinking is it is better to call it bear market because then we can imagine four-five years of a bull run instead of calling it a correction in a bull market and which means another bear market is coming. My thinking is that the US market is falling at a pace which is in a sense going to bring their settlement faster in terms of some value emerging.
That will be a signal or whatever trigger for the rest of the world which may directly not be involved in the sense that it may not be our problem because our inflation is not high, etc, etc, and then we will start again. But the long term themes will not go away.
If you have a five-year view, what you should do with 100% money because we are also invested 88-90-85% and 10-15% when we are trying to be cute about it; but the long-term themes do not go away simply because those are the themes of the world which are financials, consumer, technology.
The Forbes list of billionaires is a good indicator of where this wealth has been created because it represents whatever they have made historically and what it is today will come from these three-four sectors. Once in a while, one may go offline and buy one event here or one company there, but thematically the three themes of the world and particularly for India, will always be financials because that is a growth sector because the economy grows at X, financial sector grows at one point X times X, we are underpenetrated and underleveraged.
We also have so many consumers and tech and pharma because we are cheaper than the world in terms of producing these things. There will always be these three themes day in and day out.