Mumbai: With the market perched at 17,000 levels, is most of the juice out of the rally? In an interview, New Horizons Investment director Madhav Bhatkuly says the Sensex could move anywhere between 12,000 and 18,500, and the Nifty between 3,500 and 5,500 over the next few years. Edited excerpts:
Are you convinced this is a new bull market or are you sceptical?
If I look at the screen, stock prices, and the smiles on people’s faces, it certainly appears like one. But there are many characteristics to this move which suggests that it may not be. Fundamentals suggest that for this move to sustain, we would continue to need monetary stimulus or some dramatic shift in fundamentals. I think we may be far away from that.
If I had to make a bet, I would say that rational central bankers would probably try and tighten money supply with the advent of a sustainable economic recovery.
How soon? A lot of people believe that it is not happening for the next six-seven months at least.
So six-seven months; in the short term, markets were driven by perception and liquidity; in the medium term, it is reality and fundamentals. So if it happens one year down the road and we are into the zone of another bubble and the index is beyond 21,000, I can bet you that just as 2008, this will end in tears too. But if central bankers around the world demonstrate sanity, then I think this will be a sort of muted market rally which will be range-bound for several years to come in.
Stock-taking: New Horizons Investment’s Madhav Bhatkuly. The description of a bull market is going to change with this particular rally.
You are in a situation right now where literally everybody is looking at CPI (Consumer Price Index) and WPI (Wholesale Price Index) in India to determine whether we are in the throes of inflation... The last problem in the world had nothing to do with CPI, it had everything to do with asset price inflation. Have a look at what has happened in the last two months—real estate prices in Mumbai, Delhi, London, New York, Peru and Costa Rica and every single place, you have seen a synchronous up-move. It suggests that central bankers will start looking beyond the traditional CPI and, therefore, might tighten sooner than later.
However, central bankers have been very sensitive to how equity markets and asset prices have moved. Would they risk pricking this bubble at a premature stage in December-January-February which could have the effect of bringing the market down completely?
I think the choice is very limited. First, look at what has happened. The world needed two units of monetary stimulus—I describe monetary stimulus as steroids—and the central bank gave us 25. The money supply within the system increased even more because GDP (gross domestic product) growth and demand for credit declined vertically.
So, if a certain portion was needed, more than that was given. Since GDP growth and credit declined, we ended up with even larger portions which have ended up in assets. So, even if you have a robust, sensible recovery and demand for credit picks up for creating industrial infrastructure, you will see liquidity tightening anyway.
You are saying that easy money has been made and for several years do not expect anything like this kind of return?
The description of a bull market is going to change with this particular rally. It may not happen for the next two-three months, you might see a final burst by 500-600 points, or a 1,000-2,000 point is entirely possible. But look at the nature of this move, I think it is very reminiscent of what happened in India from 1992-2003, except for that up-move during the tech move in 2000. Markets were range-bound from 4,600 after the Harshad Mehta scam to 2,900 in 2003. Was it possible to make money? Of course, for sensible, diligent, heavy stock pickers. Was it possible to make enormous sums of money? Yes, Infosys went up 100 times, HDFC Bank went up 25 times; however, you saw high inter-sector, intra-sector earnings divergence and dispersions.
What do you do with your portfolio now? Do you just get out of high beta because if your view is that we are in the last 20% of the rally, you start paring down risk on your portfolio? (Beta is a measure of a stock’s volatility; the higher it is, the more volatile a stock.)
If we are seeing a decisive change from what happened in 2003-2007, you have got to move away from being a macro investor to being a micro investor. This was a phase that India has actually been prominent for and you don’t have to go very far.
Look at the emerging markets of the world. This is an extraordinary market. Look at any emerging market; it lends itself to some sectors or some specific companies. In Korea, you think of Samsung Electronics, Brazil-Russia, you think of commodities, China, you think of outsourcing and metal bashing industries.
What do you really think of when you think of India? Is it IT (information technology) and telecom? Is it banking or is it 1.1 billion people and, therefore, it’s consumer and retail? This is an incredibly diverse market. If you have some sensible adjustments in monetary policies, some sensible adjustment in macro thinking from the government and sane levels of liquidity, you will always find a bull market in some segments when you have 6,500 listed stocks.
I would say be diligence-heavy, find individual ideas. There will be individual ideas of opportunity where valuations will be in our favour and when you do find those, bet your house.
What if earnings, which were extremely tepid in 2008, start accelerating now? We go to 10-12% this year and get back to above-20% kind of earnings growth 2011 onwards and that fuels a revaluation exercise which takes the index to new highs and sustains. Is that likely?
We already are in a fairly strong earnings move. If you look at the Q1 (first quarter) of the current fiscal, it is quite interesting. Top-line growth has been fairly muted and bottom-line growth has been much stronger than top-line growth. If you talk to companies across India, you find that a lot of people reacted very quickly to the negative news that they ended up receiving towards the end of 2008. Fascinatingly, if you look at recessions in the past like the vicious one in the 1970s or in 1929, you find that in the first phase of the decline, earnings actually rise because costs were cut faster, then top-line recovery happens. I think India has been similar. There is a possibility that the world recovers viciously. If the world recovers viciously, then I would imagine money supply would tighten viciously and if that does happen, markets could stay muted anyway.
What is this range you are seeing for the next few years?
I would say we are at fair value right now. So, if I take 20% below fair value, it would be 12,000; if I take a 20% north of fair value, it could be 18,000-18,500.
On the Nifty, it could be anywhere from 5,500 to 3,500 but that is the sort of range that I see markets being bound in for a while. That is not to say you are not going to make 100% of your money or 200% of your money; in some stocks, (you) will but they may not necessarily be those which are represented by the indices.