SORRY BEARS – No new low for Indian markets

Over the last few months most market commentators have been focused on the fact that there is going to be a new low made in the Indian markets and that the markets have not bottomed out yet.

I remember going to the investors conference of a very large foreign brokerage with an Indian partner in the month of January 2009 and I found the mood to be extremely bearish. There were companies presenting in that conference that would be among the top ten corporates of India in whose presentations a year back more than 100 investors would have participated, however this time the number of investors attending the presentations were in the region of not more than ten. The consensus 100 upon 100 was that the markets will make a new low and there is unlikely to be a recovery soon. In my discussions with the participants in that conference i found that the mood was extremely bearish. That was the time i got convinced that there is going to be no new low at least for the Indian markets as history has shown us that consensus never turns out to be true.

The search for lower levels to invest in the markets is an ever going process. However there are both technical and fundamental factors that one has to evaluate before coming to a conclusion on any such event occurring. Like i commented in one of my earlier articles on the blog the technical factor that could have taken the markets to a new low was sheer momentum of the downside where rampant shorting and continuous redemption from offshore funds and hedge funds investing into Indian and other emerging markets could have taken the markets to a new low. However that momentum seems to have broken down now and is unlikely to restart in my view. The downward momentum has clearly been broken.

The movement in a number of emerging markets vis a vis markets in the West is very similar to what happened in the year 2002 after the markets made a panic bottom after the September 11 attacks in the USA. Most Western markets made a new low in 2002, however most emerging markets did not, and i believe the same is likely to repeat this time also. This time even the fundamental reasons are much more stronger as economies like India, China, Brazil etc are likely to take the hit from the the global economic slowdown much better that the developed world. As such we have seen a large number of developed country markets make a new low in February 2009, however most emerging markets have held on much better.

All key economic parameters like inflation, interest rates, input cost pressures for corporates are turning for the better. Demand pickup has started on the consumer side and is likely to pickup significantly post elections ( if there is no third front with a strong left, which is an unlikely scenario in my view ). Another important thing is that analysts have turned excessively pessimistic on the markets and are projecting either no growth or a very slow growth in earnings next year. However i believe that clearly economic growth is in the process of bottoming out in India and markets will bottom out much before growth bottoms out. There is excessive bearishness on economic growth which does not take into account the start of a large new refinery, gas production by Reliance Industries, increase in electricity production due to greater availability of both gas and coal, higher consumption due to lower interest rates and higher public sector employee salaries, increase in economic growth prospects due to greater government spending etc.

I have been amazed seeing the kind of views most global fund houses and analysts have been giving on various business channels over the last two months where everyone is so focused on the USA and the fact that unless USA recovers other economies will also not recover. I believe this reflects a superiority complex and is a vestige of the colonial past where these people still believe that the Western world is the centre of the universe. Most of these people forget that in the 1990’s the USA and most of the other European markets had a secular bull market which lasted for more than a decade and in this period the Indian markets went nowhere. The Dow Jones index went from around 2500 in 1990 to 11750 in the year 2000 ( before the Internet bubble burst ). In the same time period the Sensex went up from around 2000 to 6000. China in this decade embarked on the process of rapid economic growth ( again with low inflation ) and the Chinese markets went up by 10x in the same time period i.e. a 1000% return. The reason was that that was the decade in which most Western economies grew rapidly with low inflation. The same decade is likely to occur in India from 2010 onwards.

I will discuss more on the long term prospects separately as i wanted to focus this time on the fact that i clearly believe that a NEW LOW in the markets is unlikely to occur due to a combination of fundamental and technical reasons. Also the one unique event for India which could have created the NEW LOW, the elections are also likely to get over by the middle of May.

The markets are likely to become stock specific from April onwards when the full year results for the current year come out and will provide an excellent opportunity to build up a long term portfolio.

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