I will start this article by quoting what i did at the end of the last one
“The genius of investing is recognizing the direction of the trend -not catching the highs and lows”
As i say this I will also add that i have been guilty over the last few months of doing something that i have not done in my career in the past and which is trying to predict short term market movements of swings of 10-15% and trying to invest and make short term investment decisions based on these views. I believe this has been a function of the fact that I started off managing my current PMS assignment just at that the time when the election results had come out and the markets had gone into a frenzy. This obviously makes one cautious about investing when the markets have run up by 80% in a period of just 2-3 months. The risk for going head on into investing after such a move is that there can be a sharp and severe correction which can result in the first investments going into losses. However when the long term view is extremely bullish it is important to ride that conviction more than trying to read into short term market movements.
In this context taking into account the macro improvements on a global basis, the emergence of countries like France and Germany from recession, the strong showing of corporate India in the first quarter, the aggressive stance of the government on disinvestment , the strong revival in Industrial Production & adequate availability of reasonably priced credit as positives and the failure of the monsoon as a negative I am now coming around to the view that there is huge underlying strength in the markets and the markets are poised for a strong upmove in the last quarter of 2009. I believe that technically also the markets have formed a very positive pattern where the downside to the markets from where we are today does not seem to be more than 10-12%.
So in the context of my overall view that the markets will reach a level of 35000 for the Sensex in a period of 45-50 months of the start of the current upmove in March 2009, what should the year end look like. I believe that by the end of the current calender year we should be going to a level of around 17-18000 for the Sensex and 5200-5400 for the NIFTY.
Now the question is that what will lead to this strong upmove and wouldn’t valuations get extremely stretched if this was to happen. I do not really think so, as during the course of the next few months we will see upgrade in economic growth and earnings numbers and in all probability we will be looking at a SENSEX EPS of 1200 for the next financial year i.e. 2010-2011. This will make the valuation around 15 times 2011 earnings which is reasonable for the first stage of the revival cycle where growth and earnings both accelerate.
If this is to happen then which sectors will contribute is then the question.
-I believe that one of the underperforming sectors of the current cycle namely Oil & Gas should pick up in performance with the revival of global growth and the fact that oil prices are also double of the trough levels.
–Automobiles should continue to do very well with easy and cheap credit availability. This sector has seen a strong correction lately driven by monsoon fears. However the reality is that the rural economy has seen a huge growth in incomes over the last three years, the farm loan waiver has cleared of the balance sheets of lot of farmers and high agri commodity prices will also compensate for lower production. I am not so worried about rural demand, unless we have continuous crop failures for a couple of seasons.
–Banks and Financials should underperform in the near term due to low credit growty, increasing NPA’s, lack of trading gains and reducing Net Interest Margins. This sector should pick up in the third quarter.
–Engineering and capital goods should see a pick up along with the reviving economy, the availability of equity financing and improving credit availability.
-Although overall commodity prices should not move up substantially from where they have already reached, the prices are higher today than most analyst assumptions. As such even this segment should start seeing growth in earnings from the third quarter onwards. –
–Pharmaceuticals and Consumer good stocks should perform reasonably well. Real Estate is a sector difficult to call as it still faces lot of project delays and cash flow issues. As such I would not expect it to outperform the overall market.
–Telecom sector valuations are reasonable, however there is an overhang of increasing competition. As such it should be a reasonable performer with chances of outperformance.
–Construction and Infrastructure stocks look reasonably valued and should do well and outpeform themarkets.
-Cement could be an underperforming sector due to capacity overhang and reducing prices.
–Technology has been a reasonably robust sector and has been a very defensive one. This sector could continue to do well with the improving global scenario and increasing visibility.
So on an overall basis if there is a market sell off in the near term due to whatever concerns that might come up in the short run which could include sudden short term risk aversion, inflation fears, rise in the US dollar etc. it will be a great time to get in to ride the move in the latter part of the year. I believe this move will be much stronger in the broader markets where strong companies with excellent business models in the mid cap space should be able to outperform significantly. For stocks and companies that one likes a lot it makes sense to buy and hold with the assumption that there could be a 10-20% downside where one is looking at an upside of 50-100%.
My target for the markets is 17000-18000 for the Sensex and 5200-5400 for the NIFTY by December 2009.
“In a bear market you wish you had waited to invest, in a bull market you wish you did not” (wait)