It’s a perfect script as per Wave 3 of my wave theory – Buy bargains as you get them

I would like to start this article with an example of one of the investors and his experience in the year 2004. That was the time in May 2004 when the markets panicked post the election results of that year and markets collapsed in the short run. Sometime in 2003 I had bought into a stock by the name of Praj Industries in my portfolios at my previous assignment at SBI Mutual Fund. After seeing the stock in my portfolio one of the investor picked up around 30,000 shares of Praj Industries and at that time the price of the stock was around 25-30 rupees (adjusted for split). When the markets crashed in May this person sold out all his holdings in the stock at a price of around Rs 18. Over the next few weeks the markets bottomed out and the story in the stock played out over the next three years the stock rose by nearly 10-12 times. I got to know this story only in the year 2007 when I had a chance meeting with this investor in one of my presentations and he mentioned this incident to me. There are several examples of stocks, specifically in the mid cap side of the markets which fell during that time and then rose sharply over the next few months. I strongly believe that given the fundamentals of the Indian economy and the strong growth prospects a similar thing is likely to happen in a large number of high growth mid caps over the next couple of years.
As per my Wave theory in Wave 3 due to the issues facing most western economies growth is likely to remain subdued at an average rate of 0-2% in the USA and Europe over the next 10 years. This will result in low pressure on commodity prices as a result of which inflation will remain subdued and this subdued inflation will keep interest rates low which is the booster that India needs for its consumption and investment led growth. The key points of my theory are:
— – Given the state of the global economy, specifically the USA, Europe and Japan nearly 50% of the world economy is unlikely to participate in the next big up move
— – A shattered financial system, low savings rate and high fiscal deficits will take years to repair
— -Given the fact that a large part of these economies is driven by consumption, rising unemployment and pressure on wages will subdue economic growth .
— -In the short run these economies can be pump primed through fiscal measures .
— -However over the next 5-10 years economic growth in these countries is likely to be between 0-2% .
— -High fiscal deficits will lead to a reduction in spending and increase in taxes which will further drag economic growth .

— However in this period, India will stand out and show strong economic growth
— The key contributors to the strong economic growth will be –
— – Political stability
— – High saving rate
— -High capital inflows
— – A strong financial system
— Huge investments into infrastructure development
— As a huge deluge of dollar looks for better returns, most developing economies with potential for reasonable returns will get huge inflows
— -This will be a period of growth with low inflation as 50% of the world will not grow and demand pressures will be low
— -On the supply side there is a huge oversupply in most commodities like Oil, Steel, Copper, Aluminum etc.
— -External borrowings will remain cheap with low interbank rates and compression of spreads as confidence returns
— -Fiscal deficit will not be a concern for fast growing economies like India as growth will lead to higher tax revenues and there are disinvestment possibilities
— -Consumption will revive strongly as the situation stabilizes. Credit availability will be strong as NPA levels have been well controlled
— -Power deficit will reduce significantly with a large number of power plants getting commissioned. This in turn will reduce power costs. Easy and low cost power ability will boost GDP growth by 0.5-1% per annum.
— -Wave 3 will be backed by low inflation, high liquidity and low interest rates
— -A stable government will be an additional contributor
— -Whereas in the boom years (of Wave 1) in 2006 and 2007 nearly 124 countries grew at over 4%, in the next four years only a handful of countries will grow rapidly
— -Countries like India and China will standout and get a disproportionate share of attention and inflows

-As China handles its overheating concerns India’s growth prospects will improve as commodity prices correct
— Pace of up move in WAVE 3 will be very strong and fast and during this up move there will be continuous upgrades to GDP and earnings growth.
— Sensex EPS should rise to a level of 2000+ over the next three years
— This move should take the Sensex to a level of 35000 plus over the next 3-4 years

I believe that we are well on the way towards meeting this objective. I do not believe that interest rates are going to rise in India any time soon. The RBI knows that inflation in Indian is not structural but cyclical driven by food inflation and the low base of last year. The average inflation over the next few years might not exceed 5%. Most people will not be aware that crude oil prices have come back to the same level as last year June and in rupee terms crude oil prices are more than 10% cheaper today than a year back due to rupee appreciation. Similarly most metals peaked out in August/September 2009 and as we reach that base over the next two to three months the inflation due to that will go away due to the base affect.
It is now a proven phenomenon that inflation, as measured by the Wholesale Price Index in India is largely driven by food and global commodity prices and as the base effect of “Slumpflation” goes away inflation will again be subdued.