The way the markets have bounced back from their lows suggests that they were never in bear market terrain, says investor and trader Ramesh Damani. The market veteran has generally been bullish, but was very sceptical and correctly so throughout 2008. This view seems to be changing. Edited excerpts:
Back to basics: Ramesh Damani.
Bull or bear?
There is an old saying that if the bird talks like a duck, walks like a duck and quacks like a duck, then it is a duck, and I think all the readings that I see in the market sound bullish. I mean the market is climbing its proverbial wall of worry. You know the bear markets don’t correct so much. The screen tells you a completely bullish story...it would be correct to say that I was very bearish when the markets were going down. Perhaps this was not a bull or a bear market. This was perhaps a very severe correction in an ongoing bull market that we experienced. It was maybe a 70% correction, but a bear market by definition cannot snap back on a V-shaped recovery, the fact that the market has snapped back suggests that we were in a very severe correction of a bull market.
What are the odds that, as the sceptics still point out, this is just the liquidity talking and very soon we will have a massive fall once again?
I think, invariably we are going to have a fall sometime soon. If you look at the US employment data that came out, 9.7%, and if you look at the aggregate employment—people are looking for jobs and people are looking for part time jobs, there are 25 million people in the US who are unemployed—so there is no case to be extraordinary bullish....
Do you think that we will see 12,000 (on the Sensex) again in the next couple of years?
It could happen...I don’t think that anyone would have predicted almost exactly one year ago what would happen to Lehman Brothers or Fannie Mae and Freddie Mac or a Bernie Madoff—the best minds were following these businesses. So you never know the global markets. This could happen—within this there have been just corrections—but I think that the long-term trend perhaps still remains bullish.
Intellectually, was it a difficult transition because you got it right for a year and then the market suddenly turned and there were a lot of disbelievers on the wayside? Was it a difficult intellectual adjustment to say, no, I need to follow the market, cannot fight it?
It is painful and it makes you go home and cry sometimes, it is very painful, but it is to just time the market. I watch a lot of people and listen to a lot of people and there may be very few people who got it right. Jeremy Grantham got the top and the bottom right, some people got the top and some got the bottom right. To get both these extremes, I don’t find too many people who got it right. So it has been very painful...
It still is good that we got away lucky with just one-and-a-half years of severe price damage but in terms of time, it could have been much worse?
It could have been. Of course, we are still not out of the woods, we still might see a market going sideways for many years as we saw in the Dow—it hit 1,000 for the first time in 1968, it didn’t cross it till 1982. This was against a backdrop of economy growing at 4-4.5%...and America already at the top of the world.
So yes, I think all bull markets begin with some sort of intellectual hypothesis ...what was the 90s bull market in India? It foreshadowed liberalization that was going to take place; the 2000s: that India would become a technological superpower, although Japan’s bull market said that Japan will become the largest economy in the world, a member of the G5. This bull market, in terms of how well it bounces back from lows, is suggesting that there is something going on that is extraordinary in India and we are actually in the process of taking India from a $1 trillion economy to—not a $2 trillion or a $3 trillion—economy as even the bulls are suggesting, but—something far greater. Maybe in a generation, we will take the population from affliction to affluence, from poverty to prosperity, maybe we would go from 100 million people in the middle class right now to a billion people in the middle class and the profound investment implications for that over investment horizons. So, it is very hard to point out what is going to happen in the next quarter, next year. Yes, there will be correction, the stocks that you bought will probably go down but if you believe this intellectual hypothesis—and I am increasingly beginning to believe that—then this is not a garden variety bear-bull market. This could be a long-term story, an intellectual hypothesis that is unfolding of a country that is in the wave of transformation.
The first time countries like China, India are transforming the world, that we are going to go from a middle class of 100 million to a billion and there are important investment conclusions to reach from there.
If this is true then you should not be sideways for many years like you were talking about, you can see a high pretty soon?
On that, I am not so sure. This could be a 20-year bull market for which five years go sideways ...I don’t think it’s going to make a new high in a hurry. The first, I think, as the market goes up, the tap of paper—whether it will be initial public offerings, qualified institutional placements or public sector undertaking disinvestments though there is an appetite for it—will suck out money and go back to the primary market.
Second point is we look at the composition of the index. It’s hard to see some of the stocks, which were rightly beaten out, coming back to the January ’08 levels. I don’t want to name those companies but it is hard to see those companies go up five times, eight times from these prices.
So you won’t bet on more than 21,000 levels in 2010 at all?
I would say it is unlikely. Could it happen? Yes, it could. I would say 21,000 seems unlikely to me but the market remains fine. If you are going out picking stocks, making a living, you will do just fine.
You spoke about large-cap names in the index struggling to get back to 2008 highs. What about midcaps, they are 60-70% off their highs even now?
There is always a sense that when the market collapses, recall that all analysts said avoid the midcaps, they are decimated, no one will invest in them. The basic mistake is that we say that what a good stock pick does is that it always tries to find the discrepancy between price and value, and I have never seen anything in my life like what happened in 2008. I have made a portfolio with a lot of care, lot of construct and which has (been) beaten down ...and at some point you just threw in the towel like I did myself, saying maybe I don’t understand this, may be this is a once-in-a-kind global depression that we don’t understand—that cash will be usually important. I think that was a mistake.
I think that I made a mistake along with a lot of other analysts that ultimately you try to find the discrepancy between price and value and if it gets to be too extreme that you understand the companies are doing fine and the fundamentals are doing fine, you just step in and buy on the bridge.
So I think you will find, and as long as you keep finding these discrepancies, whether they are mid-caps or large-caps, I would be a buyer. I am not particularly biased towards index stocks or mid-cap stocks.