India is not Japan in 1990, maybe more like Japan in 1974

I have been reading lot of commentaries which suggest that the boom in the markets that we saw in the period 2003-2007 was similar to the Japanese markets upmove in the decade of the 1980’s and the fact that markets are likely to remain in a range, either sideways or with a downward bias for a long period of time and that the peak of the markets seen in early 2008 is going to be a peak for a long period of time. Such comments mainly come out of people who were extremely bearish in March/April 2009 and were predicting the Sensex to fall to 6000 levels.

I do not believe in this theory and my view is that the move in the Indian markets over this period actually was similar to the first upmove in the Japanese markets from the mid 1960’s to 1973 where the markets went up by four times in a period of around five years and then corrected over the next 12-15 months. The reason is that, that was the time when the Japanese markets were recognized as a sustainable long term growth story and most investors realized that this would be the growth market for the next two decades. After the destruction of the Japanese economy in World War II the early years were spent in regaining the momentum. By the mid 1960’s there was a new type of industrial revolution in Japan where the Japanese started moving towards becoming world class in a number of industries including Automobiles, Ships, Machine tools etc. This was the time when value addition improved and the composition of the GDP started changing with retail, finance, real estate and other services industries picked up. This is very similar to what we saw in the period of 2003-07 in India.

Subsequently came the period from early 1973 to 1974 where due to the oil shock and rising inflation there was a slowdown and high inflation. This is similar to the crash we saw from the early part of 2008 to March 2009 in India where this time it was the Financial Crisis which caused the market sell off.

This phase led to the start of a more dynamic growth phase with improvements in productivity and headway was made investments in several other new growth industries like consumer electronics, computers etc. The Japanese economy continued to grow strongly till the late 1970’s despite lot of challenges related to the global economy. I believe that the Indian economy driven by investments in Infrastructure, a strong domestic consumption story as well as a rapid expansion in services industries is set to grow at a rate of 8-10% over the next decade. India is today getting recognized and identified as a hub for small car manufacturing. This growth rate should lead to a sustained bull market in India over this time period where this kind of growth will be something that is very rare in a world economy that is struggling to grow post the financial crisis. Although the Oil crisis of the 1970’s is different from the Financial Crisis of 2008, it is similar in its shock and awe value.

Even before the Japanese markets blew off in 1982, the markets had moved by by nearly three times from its bottom of 1974. From the 1974 bottom the Japanese markets went by by more than 10 times by 1990.

At the risk of repetition I will again quote some points from my WAVE theory as to the reasons for the impending boom and the overall direction of the markets.

I believe that given the state of the global economy, specifically the USA, Europe and Japan nearly 50% of the global economy is not likely to participate in the next big up move. USA and Europe have big structural issues with their economies and their financial institutions are totally in shatters. It will take years to repair these institutions and encourage them to take the risks required to provide capital to the economy. The saving rates in these countries are abysmally low and with increasing unemployment and pressure on wages this would not increase significantly. Also given the fact that a large part of these economies are driven by consumption, given a combination of the above factors consumption is likely to remain very muted for the foreseeable future. The governments of these countries will be able to pump prime these economies through fiscal measures in the short run, however over a period of 5-10 years these economies are unlikely to grow at an average rate of above 2%. Infact the averages will be between 0-2%. In order to pay back the huge borrowings due to fiscal spending these governments will have to reduce spending and increase taxes eventually, which will again become a drag for these economies.

However this will be a period in which India specifically should stand out and show very aggressive growth. Given a combination of political stability, high saving rate, high capital flows, a strong financial system and huge investments in infrastructure development the economy will go back to a growth of 8-10% very very fast.

–As the huge deluge of dollars searches for returns and as the dual carry trade plays out we will see most developing countries with a potential for generating reasonable returns getting huge inflows both as portfolio flows and FDI.

-This will also be a period in which growth will happen with muted inflation and low interest rates. The reason why inflation will not pick up is that more than 50% of the global economy will hardly see any growth over the next five years and as such demand pressures will be low. This will resulted in commodity prices remaining suppressed (not withstanding the current rally backed by dollar weakness and expectations of economic recovery). Moreover the investments that have happened in capacity expansion over the last few years have led to an overcapacity in lot of commodity industries which is unlikely to correct in the near term

-External borrowings will remain cheap with the dollar LIBOR rates at all time low levels. Eventually the spreads on borrowings will also compress.

-Fiscal deficit which is pointed out as a concern will not be a concern for fast growing economies like India as repayment of these borrowings will be easy due to high tax collections growth due to strong economic growth and increasing tax compliance. Over a period of the next 5-10 years the country ratings of India by global rating agencies will also move up as most Western countries get downgraded.

-Given the fact that most corporates have come out of the current crisis without too much damage to their balance sheets (despite the currency derivatives and FCCB issues). Most Convertible Bonds are also likely to convert now, given the rally in stock prices.

–the financial system has not seen a huge up tick in NPAs the investment cycle should remain strong. As the economy starts to recover and confidence comes back consumption demand will also revive very strongly.

Having learnt from the mistakes of the past corporates, individuals and the government will drive towards productivity and better delivery. Over the next two years India will see a huge increase in domestic oil and gas production which will reduce import dependence and provide a fillip to lot of consumption industries.

-A large number of private and public sector driven power plants will get commissioned over the next three years which will lead to a strong growth in electricity production and reduce power deficits drastically. This will also lead to a fall in the abnormally high merchant power rates that we see today.

-An increased emphasis on the roads sector will see the highway projects again falling back in place after virtually no development on this front over the last five years. There will be large investments going into various kinds of low cost and mass housing projects which will have a huge multiplier effect on employment as well as the consumption of key inputs like cement, steel etc. Lower consumer credit rates will lead to a strong revival in demand for consumer durables, which is something that we are already seeing.

-Unlike in Western economies where companies are being nationalized the Indian government is in an envious position where it can raise Rs 50000 crores every year with just small disinvestments of a few PSU’s. These resources can again be used for spending by the government in all its key projects.

I believe that the pace of up move in the markets in WAVE over the next few years will very strong and fast and the Indian markets should double from the current levels over the next three years.

The big bubble upmove that started in Japan in the decade of the 1980’s to end in 1990 is still a long way off and I believe that predictors of doomsday are jumping the gun atleast 15 years too early.

“The four most dangerous words in investment are ‘This time its different'” – John Templeton

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