In yesterday’s post I had highlighted that the previous two market cycles had not ended well for the broader markets (see here). By the time the cycle had ended, a large majority of stocks (smallcap and midcap) had given up much more than what they had gained on their way up. Only a couple of hundred stocks ended the cycle with some gains.
This is however not to take away anything from the fact that many stocks like Havells, Escorts, Page Industries, PI Industries, IndiaMart, APL Apollo, L&T Tech, SRF etc. changed their orbit and moved sustainably higher in the previous two market cycles. Also, many stocks either moved to the lower orbit or just vanished as the market cycles were coming to end. JP Associates, ADAG Group stocks, Suzlon, Jet Airways, DHFL, IL&FS, are some of the examples. This is the story of every market cycle and there is nothing unusual about this. This story will inevitably be repeated in the current market cycle also. By the time cows come home, some companies would have transcended to the higher orbits; many would have been relegated to the lower planes; and some would have made an ignominious exit from the markets.
The issue to examine at this point in time however is where do we stand on the current market cycle - Has the cycle peaked and the indices have commenced their descent? Is the market taking a pause and a lot of climb is still left? Have indices already completed their journey downhill and are close to their base camps?
It is of course beyond my sphere of competence to portend where the markets are heading in next few months. Thus I would know the answer to the above only in hindsight.
However, as I hinted in yesterday’s post (see here), the empirical evidence indicates that the current market cycle may be far from over. Therefore, we have either just started the descent and have a long way to go down; or it is just a pause in the climb.
If someone forces me to take a bet, I would bet on the “pause”, for the following five simple reasons:
1. The Indian corporate sector is embarking on a major earnings growth cycle, led by financials, after more than a decade. The valuations are nowhere in the vicinity of the “red line”.
2. The global central banks have already embarked on a major monetary tightening cycle. There is no reason to believe that their united effort would be defeated by inflationary forces. All central banks acting in unison shall be able to defeat inflation in next 6-9 months, as the logistic constraints due to Covid-19 have already started to ease materially. Lower inflation (or deflation) and smooth supply chains shall help both the consumption and manufacturing in India.
3. Higher policy rates and tighter liquidity shall impact the growth more in advanced economies as compared to the emerging markets. This shall reverse the direction of global investment flows towards emerging markets, as has been the case in the past tightening cycles.
4. The inflated (bubble like) valuation like new age businesses are a very small proportion of the Indian public market. A vertical crash in these valuations may not have a crippling impact on Indian markets.
5. In the past 5 years, Indian corporates have deleveraged their balance sheets materially. Most of the “large” bad accounts have been identified and the restructuring process is either completed or is ongoing. The probability of a major shock to the financial system stands significantly reduced.
In other words, for the markets to collapse from here we would need major disappointment in earnings; collective failure of central banks in reigning inflation; a global recession and collapse of some major enterprises. To me these events are less probable.
So how do I see the market moving in FY23?
I believe once the markets assimilate the impact of Fed lifting rates and geopolitical noise subsides in the next couple of months, we are more likely to witness a “bore” market rather than a “bear” market. The exhilarating “hope” trade (new age businesses, macro improvement, China+1, EV, PLI etc.) shall pave the way for the “patient” value trade that shall benefit from controlled inflation, positive flows and sustainable rise in earnings trajectory.
There is nothing to suggest that the existing stock of domestic money in the stock market may fly out in the next couple of years; even if the fresh flows slow down. As the breadth narrows down, the AUM of mutual funds and portfolios of investors may get more concentrated in top 150-250 stocks keeping the benchmark indices high, even though the broader market indices struggle at lower levels. In the past we have seen this kind of market during 1995-96; 2001-03; 2010-12, and 2018-19.
To sum up, FY23 may be the time when the tortoise may chest the tape while the hare lags behind.
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