Markets have had a surprising rally in 2012 and sentiments have also turned positive, with many suggesting the start of a new bull market. Against this background, Vishal Chhabria and Jitendra Kumar Gupta spoke to Ramesh Damani, member of the Bombay Stock Exchange, for his views for a variety of subjects, including what’s in store for the rest of the year. Edited excerpts:
There are elections across the world and that is seen as a sign of extended liquidity. The flow of bad news has also reduced, particularly from the US. How do you perceive the situation?
Every four years, the Federal Reserve releases money so that the economy does well. So, what you are saying is correct, but I think it signals rates are going to remain low in Europe and the US till 2014. Most of the easing is already in the books.
India is probably on the high end of the rate cycle and has just started seeing interest rates come down, which is always good for liquidity. So, the easing will continue. You could ascribe this to the elections or economic crisis.
The US is in the grip of a bull market. You need a cocktail of three things for a bull market to take place. The first is scepticism. Actually, there is no one who believes the US, in the midst of its crisis, could go into a bull market. Second, you need leadership. And, that is with all technology stocks you name — Google, Apple, Facebook or Twitter. Technology stocks are showing unbelievable gains. Finally, you have a lot of liquidity available, already signalled by the European Central Bank and the Fed.
So, when the Dow, considered the mother of all markets, moves up and reaches its all-time high — my prediction is it will go up to 14,000-plus — it’ll carry all other emerging markets along with it. It’s generally the feel-good factor that comes to other emerging markets. I’m hopeful that 2012 will be a much better year.
Many were expecting a rally in the second half of 2012. Since we saw a large rally in January, what’s in store for the rest of 2012?
In India, we had a bear market for almost 15 months and we also had the gross domestic product-market capitalisation ratio going down to 0.6 times, the historical bottom in domestic markets. The recent price momentum suggests we made an important bottom in December last year. The market will remain buoyant in 2012, compared to 2011. In fact, I’m hoping we will close with solid gains across the board at the end of the year.
Do you think this is the start of a new bull market?
It’s too early to say that, but early evidence suggests it might be happening. We will know this in another six months or so. Some of the things we will look at are whether the market can keep making higher highs and is the leadership coming into the market? Ultimately, if it has to be a true bull market, the solid and A-quality stocks should lead.
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Do you think there is enough steam left in large caps to take this rally higher?
Typically, when prices begin to appreciate, the first leg of the rally is led by the cats and dogs. This is because those stocks are so beaten down and so under-owned that even a small buying could lead to appreciation in their share prices. Generally, the markets do things in the extreme. What we are seeing at this stage is that the cats and dogs are moving up. However, six months into this bull move, we could see movement in cyclicals and interest rate-sensitives. Movement in blue chips will perhaps come later. The great moves will happen after four to six months into this market (June or July).
Overall, the market is building a base because its breath is good. That does not mean the market will not correct or will not have bad periods. Yes, the markets will go through bad periods as well. But, broadly, at this point, I’m crossing my figures that the December bottom will hold.
Do you expect a particular level for the markets on the higher side?
It’s difficult to predict the markets. But since inflation and the interest rate cycle are coming down, and global liquidity remaining high, it’s a good time to remain long. Maybe one or two quarters down the road, earnings should start surprising on the upside. In fact, on the ground level, (indicators) like cement dispatches and auto sales, are all beginning to look up. I can only see these getting better with interest rates going down.
Are domestic elections a risk?
Elections happened in 2003, as well. If you recall, the bull market started when the Bharatiya Janata Party lost and the Congress came into power with the Left, and the markets tanked one day by 500 points and another 300 points next day. But, it almost immediately recovered in the end because it was in the bull market. I’m sure there will be nasty surprises but, typically, the bull market will absorb there. The joker in the pack could probably be oil prices. There are suggestions that oil prices have peaked and they could probably go down this year, maybe to $60-65 per barrel. If that happens, there is a huge bonus for India in the form of (lower) budget deficit and input cost. The markets will discount things six-seven months ahead. So, if you wait for oil prices to fall to $70-80 per barrel and buy stocks at that time, you’ll be paying much higher prices in terms of the Nifty.
Any sector and theme that one can focus on?
Consumption will still play out to be a big theme in India. I am bullish on media and see it as a dark horse. The results will be under pressure for the next two quarters. But because of the passage of the cable digitalisation Bill, there’ll be huge winners and losers. There’ll be huge opportunities for broadcasters and distributors. We are particularly bullish on the electronic media space. I think one can build a portfolio for the next five-seven years in fast moving consumer goods, media and technology. Real estate is another area; the market could compound at 20 per cent annually over the next 20 years because there is a huge demand for housing.
But, the trick is to find companies with good corporate governance and (whose) promoters (are) not over-leveraged. You could also see housing finance firms and companies, which supply material to the housing demand, doing well. The intelligent ideogram to this bull market is India’s middle class is going to grow from 50 million people to 500 million in 20-25 years, equal to the US population today. It has huge implications for the housing and entertainment sectors.