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Is this the beginning of a multi-year bull market?


Posted on 12-May-2017 Comments  0

Is this the beginning of a multi - year bull

 market?

Ever since the Nifty and the Sensex touched a new high, the big question has been whether the market is overpriced. To answer this question let us look back at some interesting facts. The Nifty had touched a level of 6200 back in January 2008. Over the last 9 years, the Nifty has moved from 6200 to 9300, or approximately a gain of 50%. That translates into a compounded annual growth rate (CAGR) of around 3.85%. That is lower than what you would have got on your savings bank account where you can earn around 4%. If you look at the last two years, the Nifty has hardly moved between March 2015 and March 2017. Obviously, there is a strong statistical case for the markets to go further up from here to justify the growth in earnings during this period.


What about bull markets in the past?


The last multi-year bull market that India witnessed was between 2003 and 2008. From the bottom of March 2009, the markets rallied till November 2010 purely on the back of liquidity flows. During the last 9 years, the Indian market has been through the sub-prime crisis, the European financial crisis, the Chinese slowdown, BREXIT, a crash in oil prices and a series of skirmishes that threatened to explode into full-fledged war. That begs the question; whether we could be sitting at the start of a multi-year bull market. Could we see something on the lines of what we saw between 2003 and 2008 from current levels?While these things are hard to predict, there are 4 reasons why we could be at the cusp of a major bull market…


Reason1: Earnings growth may be finally coming back…


Earnings growth, especially the operating profits, has been showing traction for quite some time even as top-line has remained tepid. But we believe that demonetization and GST put together will give a big push to the top-lines of Indian companies. The GST is expected to add nearly 2% to India’s annual GDP growth. As logistics networks get revamped, the benefits to corporate top-lines and bottom-lines could be huge. But above all, it is likely to be a mean reversion. Indian corporates have shown flat to single-digit growth in profits since 2010. That will see a mean reversion to the long term average growth which is above 15%. Earnings may be finally coming back and that will drive the markets from here.


Reason 2: Dividends of cheap oil will continue for a long time…


Between November 2014 and January 2016, the price of Brent Crude has fallen from $115/bbl to a level of $26/bbl in the global market. Currently,the price of Brent is ruling at around $48/bbl. Over the last 3 years trillions of dollars in wealth has shifted from oil producers to oil consumers. India being dependent on imports for 80% of its daily needs is one of the biggest beneficiaries. Cheap oil and tepid commodity prices have contributed in a big way to reducing the costs of Indian companies and improving their OPM. That will continue to contribute to sharper rise in profits in the coming quarters.


Reason 3: India continues to remain largely immune to global headwinds…


That could be the big advantage for India. India is not like the commodity-driven economies of Latin America and Australia which predominantly depend on Chinese demand. Nor are the fortunes of Indian companies too influenced by trade policies in the US and Europe. India, on the other hand, has its own set of internal dynamics. With a vast domestic market, India is likely to be driven more by domestic consumption rather than by external demand. It is the consumption story of India coupled with rising incomes and a positive demographic structure that will stand India in good stead.At a time when too much economic dependence is coming into question,India has the benefit of a large de-risked business model. That could contribute in a big way in reducing the risk of cyclicality in the performance of Indian companies.


Reason 4: Macros could work in India’s favour…


That is another major positive that has worked in India’s favour over the last 3 years. Inflation has come down to below 4% and looks set to sustain at these levels. The fiscal deficit is down to 3.5% and the current account deficit is less than 1% of GDP. The government,despite its expenditure commitments, has maintained the fiscal discipline of not permitting spillages in the fiscal target. This should be a big positive for India’s external rating. GDP growth at above 7.5% is likely to be at least 120 basis points higher than that of China. And the foreign exchange position is good enough to cover 12 months of imports. Add to that, the INR has strengthened from 69/$to 64/$ giving conviction for the sustenance of portfolio flows.


India could be in a sweet spot. On the one hand, costs are down due to cheap oil and on the other hand domestic demand is picking up with remonetization. The macros and the micros are finally working in favour of India. As earnings traction starts picking up and valuations gradually get re-rated higher, India could be poised at the base of a multi-year bull market. One only hopes that the Fed does not get too aggressive on tightening liquidity as that may be the only roadblock for a big bull market in India.

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