That Time Is Here

The trouble with predicting the market is that even if you are right, it does not mean you will make money. The stock markets always discount the effects of future events much before they happen. Besides, the traders in the market do not have any patience for the future. They want to make their money now, this moment. They always outweigh the investors in the market.

This time around, the Indian markets seem to be on the cusp of a turnaround; almost every investor sees a long-term bull run ahead. Now, investors will also tell you that to predict a bull market is an exercise in vain at best. But now, they are predicting a long-term bull run for the stock markets.

Earlier this year, one of the savviest investors in the country, Uday Kotak, CEO, Kotak Mahindra Bank, said “Indian markets are coming close to a fundamental bottom and will build a strong base after some time correction.” If we look at the last five months, there has been a consistent rise in the market and a correction, thanks to Brexit.

Kotak is not just an entrepreneur or a banker, he comes from a family of investors. He understands markets better than any other CEO in the country. As he said, the markets did bottom out in February, and in fact, have been on the rise since.

He is, however, not the only one betting on it. Almost every veteran investor is putting in money, even private equity funds that invest in the secondary markets are not ready to sit on cash any longer. “I am bearish six months, and bullish five years. If you take a 3-5 year view, investors need to be patient for the first 3-6 months and at some point of time build portfolio bottom up,” Kotak told Economic Times in February this year.

Says Rahul Bhasin, managing partner, Barings Private Equity Partners, “I think this is the time to invest, not in the index or the past; selecting stocks is more important.” It is interesting that fund managers like him are not bullish on software stocks — a sector Barings has been most successful with. IT stocks are no more the market favourite. The sector is seen as a mature industry unlikely to give an impressive growth momentum. Besides, the industry is exposed to global economy and its shocks.

Founder of Sethi Capital, Vinod Sethi — a veteran investor referred by some as the Warren Buffet of India — says, “Over the next few years, interest rates will head downwards. Last time the interest rates were low, corporates, entrepreneurs, and even individuals went ballistic. It will again unleash the entrepreneurial spirits if the environment is right.” The environment is changing, though the investment cycle has not yet started and several sectors are still in pain.

Currently, there is an overcapacity in several industry sectors, while debt overhangs in large corporates. There’s little investment happening. Kumar Mangalam Birla, chairman, Aditya Birla Group, put it well in a recent interview to a financial daily, when he said, “I think it will be a while before private capex goes up. Most corporates have large debts on their books even now and it will take time to get those debts down to a reasonable level. Given the current environment where the Reserve Bank of India (RBI) and banks are coming down on NPAs (non-performing assets), it is the most unlikely time for most people to invest and do large capex. Also, you have large overcapacities in several sectors.”

So what Birla did in this situation is, he acquired distressed assets, bet on a higher utilisation and bought cement companies. Should retail investors also do that?

In the same interview, Birla says: “I expect some sort of a revival to happen in the next few quarters. Internally, the big inflection point is going to come when the government steps up its investment in infrastructure.”

The government is, of course, pouring in investment in roads and highways. Officials in the ministry of roads and transportation recently told a newspaper, “We are confident of crossing 800 km in June. In May, the total construction was 677 km against 468 km in April. Now the task is to maintain the pace to meet the target of 15,000 km this year. The pace of highway construction in June is likely to be two-and-half times more than what UPA had achieved when it went out of power.”

The revival Birla was talking about is apparently happening. Cement stocks have been moving up over the last two quarters. Even some of the most underpriced ones such as India Cements have begun to soar.

Investment in roads and highways, however, is not enough to move the whole economy. Besides, the banking sector is still not ready to come out of the NPA mess. The reason why capital or debt — the biggest driver of any corporate investment — is lagging. Equity flows may replace some of the overhang in the short run, but for the economy to start firing on all cylinders, it is important for credit offtake to start.

RBI governor Raghuram Rajan may have beaten down banks on their lending practices, but the next governor will be under pressure to drive credit growth. Though there is a debate in the policy circle that this should not be a forced act. Last time Pranabh Mukherjee as finance minister forced corporates to borrow and banks to lend, it led to most of the NPAs in the market now.

Global Markets
Most skeptics fear uncertainty in the global markets. Their fear isn’t without reason. In a recent report, Morgan Stanley raised the probability of US heading towards recession in the next two to three quarters to 36 per cent. And most recently, the Brexit .

With such turmoil in the global economy, trade is expected to slow down and protectionism is expected to rise. Political realities will dictate ban on immigration, which will further impact developed and developing markets. In such a scenario, it is unlikely that companies depending on exports or exposed to global markets will do well.

Indian markets have traditionally been driven by global liquidity flows. Will it be different this time?

Currently, some of the funds that exited India during Brexit did it due to the demands of redemption in home markets. The correction in the global markets will continue. Initially, there will be flight to safety, which always means gold or dollar. Once the panic subsides, there will be search for growth again. As of now, the hedge fund managers are only going to watch their global allocations.

Kotak, opines, “While we must welcome global investors, we must make the Indian investment thesis attractive to any investor whether local or global. Being investor-origin neutral is the core to building a strong economy. Yes, we must welcome foreign investments, but a large part of the domestic investment comes from domestic savers. We have to be investor-neutral for attracting investments.”

Where To Invest
While the index is the barometer for stock markets, the current indices, particularly the BSE Sensex and the Nifty are heavily weighed down by banking stocks — not the best sector to invest in the coming rally or mid-term. The consumption theme is going to be popular as it has already attracted investments. Companies such as Nestle, Dabur and even Hero Honda are driven by this theme. Pharmaceutical sector suffers from a regulatory pricing overhang, but it is stock pickers’ paradise for multi-baggers. Agriculture-based companies such as Jain Irrigation are expected to do well with better monsoon, as its consumers are farmers.

Mumbai-based Bimal Parekh, director of Sunidhi Wealth Advisors, says, “Investors have become traders these days. They don’t really look for the long term. They ask for tips and buy and sell for small trading gains. They take a 20 per cent return and are satisfied with it. Traders do not create wealth. As this is a five year market, patience is needed.”

While the government and reforms are the favourite themes for lobbying industrialists, investors look at them differently. As a fund manager from a large Canadian Pension told me, “We do not care if the government is left or right wing, what we care about is the performance of the economy and companies. The government is only a risk factor, if it is unstable or causes a war or something.”

Whether it’s a three-year bull run or five, a run has started for sure.

The author is a Delhi-based policy commentator and tweets @yatishrajawat