Thought for the day
“I always avoid prophesying beforehand, because it is a much better policy to prophesy after the event has already taken place.”
-Winston Churchill (English, 1874-1965)
Word for the day
Fussbudget (n)
A fussy or needlessly fault-finding person.
(Source: Dictionary.com)
Teaser for the day
China slowing, Russia stagnant and Brazil downgraded.
Only “I” of the BRIC seems to be doing well at the moment!
Stop press!
I believe markets are in neutral territory at present. The
bear market has ended, but bull market is still some distance away.
The current up move is likely to strengthen further. But it
is merely a trading opportunity, not to be mistaken for a secular bull market.
Apparently my past
couple of posts have caused some confusion amongst readers as to what is my
present stance on Indian equities. Some readers have pointed that I have been
generally bearish on Indian equities but some recent posts have exuded uber
bullishness.
I feel it is
appropriate to eliminate all ambiguities, which are completely unintentional,
and put things in a clear perspective; before we proceed with our hunt for the
sectors or stocks that will likely lead the market in next 12-18months.
1.
I believe the primary function of capital
markets is to facilitate entrepreneurs in raising risk capital for their
ventures. A bull market is a market condition that is generally conducive for
raising risk capital at fair price.
In this respect I believe Indian markets are still some
distance from beginning of a bull market.
2.
The pre-conditions for a bull market in equities
include – (a) Greed overcoming fear; (b) lower volatility; (c) lower expected
return from bonds; (d) earnings growth led by pricing power (better margins not
because of cost control) higher RoE (higher creditworthiness) and RoA (better
capacity unitlization); (e) stable macro environment (f) stable political
environment and (g) easy liquidity conditions.
Only a few of these conditions are presently favorable. It is
though likely that more conditions may turn favorable in next couple of years.
But as of now there is little to be bullish about.
3.
It has been a common for publically traded
equity prices to move up or down materially without substantial change in underlying
economic fundamentals. The ICE rally in Indian stock market during 1998-2000 is
one such example. Another example would be the massive fall seen post the
collapse of Lehman brothers in late 2008.
The current up move in Indian equities, and perhaps global
equities too, is a secondary market up move. It is a trading opportunity and
should not be confused with a secular bull market.
The drivers of a trading up move in a bearish or neutral market
are often different from the likely leaders of the next bull market. In fact
such trading up moves are led by the wounded or dead leaders of the past bull
market. IT stock rally in late 2000 and early 2001 or bank and commodity stock
rally in 2010 are couple of examples of such occurrences.
I believe we might see a massive bubble building rally in
Indian public equities in next 12-15months, without actually entering into a
bull market. This rally essentially will occur mostly on the back of global
flows and political changes in the country.
The trading strategy for this expected rally has to be different
from construction of a model portfolio for the next bull market.
I shall outline the strategy accordingly, in next few days.
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