Q: The counter argument to how long this bear market could be is that nowadays information travels fast and therefore bear markets have got compressed. So, it could be a vicious one but it will end in one-year. What are the odds against it?

A: The economic facts say that the macroeconomic picture in India has significantly deteriorated. Economic picture in the world has deteriorated. We had almost a global bull market in all asset class based on easy liquidity. Now, those have reversed.

Q: A few years back we had a situation where interest rates were going up and then equities was not the place to be. People parked most of their money in bond funds and got 10-12% and that was the big trade. Could we be going back to that kind of a scenario where fixed income for the time being becomes a place to be and not equities?

A: We could but the trouble is that bond markets are fairly shallow in India and there are not ways to publicly participate in them. The yields even today are negative compared to inflation. One is not making real money or really protecting oneself in money.

A country like India is the best hedge is equities. The only problem is that we could get into a scenario of hyperinflation being led off by what is happening in the US, which has been printing money and needs to pay back huge amounts of dollars. So, they have an interest in making the dollar cheaper. If that happens, one would probably not make so much money in bonds or equities but perhaps in harder assets.

Q: What about gold?

A: That would be a good example. History teaches us that during inflationary times gold is a natural hedge. Hard assets are a natural hedge out there. We were seeing a slip down real estate.

So, we could see interest in those kind of hard assets. It is the only way to protect the purchasing power of a currency that is depreciating. Inflation will tend to depreciate the currency.

The problem is not starting in India. We have followed sounder economic policy. But it is starting from America where one has dollar in the risk. If one takes a look into a large number of global ‘gurus’, whether it is Jim Rogers or Mark Faber, they are all concerned that this is a 150-years cycle of credit ending and the dollar depreciating and the economic consequences of that are profound.

Investors should not look at the rearview mirror while driving but look ahead that the unusual will happen in global market places.

Q: There is one view that with equities doing so badly and us being in a bear market, cash is king. Are you saying that in this kind of inflationary scenario, cash may not necessarily be king?

A: It is not going to protect you against the coming hurricane of economic calamity that you described. If we are entering a period of high inflation, or perhaps even as some of the global gurus say hyperinflation, cash is a poor edge. If one goes back and studies the great inflation in Germany in the 1920s, which was hyperinflation, before the World War II started you had four marks to a dollar. At the period of hyperinflation, it went for four trillion dollars or a trillion dollars to a mark. So, if you go back and study those periods and this economic doomsday, I am not suggesting anything that we are approaching something like that. The central banks are much more informed. Global economic policy is much better informed but even inflation up to 15-18% casts a gloom on all asset classes across time, because once interest rates goes up, almost all assets class goes down.

So, the world will gravitate towards other sources of wealth, particularly because wealth is flowing soulfully into West Asia. The key thing is to do what West Asia will be doing. Where is the sovereign capital fund going? Are they going to invest part of their money in gold? Are they going to invest only into dollars? We need to study the flows of what's happening in West Asia because the wealth is going there. Their investment decisions whether it is sovereign capital funds or through what consumers are doing there will provide us an indication of where there is safety.

Q: How bad can it get from here when you study the complete environment around you?

A: Doomsday scenario is one in a hundred shot. But a one in a hundred shot is a shot that things can go bad. A more productive way to look at it is perhaps how low can it go.

It is a question people ask me and nobody has the answer.

But it seems very unlikely if oil remains even at these levels of USD 120-125 per barrel, then we could see a breakout above 4,500 on the Nifty.

Bear markets know no bottoms and bull markets know no tops. It’s more productive to try and think how high can an index go in terms of rally. Around 4,500-5,000 would be an iron wall which the indices will not be able to cross.       

Q: What would be the best case for a bear market rally?

A: The line in the sand would be 5,000. If we cross it and if the circumstances change, then we will have to revisit the bear case. As things stand now, I would suggest that 5,000 is the line in the sand.

Q: How much price correction or price pain have you gone through? But do you find screaming value has arrived already in the large cluster of stocks without looking at it from the top?

A: There are two points to it; typically, in the last phase of a bear market, you will have the A Group falling more than B Group. The B Group is already demolished and at throwaway valuations. So, the last leg of a bear market is led by the A Group stocks or the index stocks. If you go back and compare where the A Group valuations are today compared to where they were two years back, there is still a long way to go. Excesses have not run out of the system.

Bull markets create a huge amount of distortion. The top 40 richest families in India control a disproportionate share of wealth and free markets don’t tolerate that kind of excess in the market place. So, you will see wealth destruction in terms of index and stock.

The B group tends to bottom out ahead of the individual markets. But there is no great rush to get into the stocks because the cycle takes time to change. So, you need to look and plan and have some variables in mind. The scenario of inflation is going to be high. Plan for a scenario where money-making returns are going to be less and use those strategies rather than buy at dips or the beaten down B group or keep cash. Those strategies worked well in the last 10-15 years. This is a changing world and you might have to come up with new answers.

Q: We have seen many previous bear markets when the price fall stops at a point and then we go through a long period of just comatose behavior; stocks do not go anywhere. How close are we to that kind of point?

A: If oil keeps correcting, we are probably close to that behaviour. It is hard to make a case for the index in terms of the Sensex going down steeply if oil goes to USD 110 per barrel.

But the problem is that people have been so hurt by this fall that they are scared to come back in there. That is typically how value emerges. So, the index will probably make a small range now - from the bottom it will go up 1,000 points and then trade in a range for a while.

We are not probably far away from that point of scenario. The index cannot keep falling 500 points a day in which case we will all be out of business in 15 days.

So, we will make some sort of base and will build on that. Moving in and out of the base would perhaps depend on the call on oil prices or inflation. The political events that are playing out in Delhi are not that important - 500 points plus-minus there. But the economic factors are more important and more focused on the market.

Q: What about liquidity? Have conditions changed globally? If inflation goes up and interest rates tighten, are those heady days of gushing liquidity over for the moment?

A: I don’t think so, based on what happened in the US. Based on the subprime mortgage, there is a re-pricing of credit, risk in global markets and the easy money that is available in the emerging markets. A lot of companies are finding high stress to raise money.

A lot of people who are giving you money have a market cap smaller than the Indian companies.

Q: How do you plan your strategy in a bear market? 2000-01 was one of the best times to pick stocks and they quadrupled and picked up 5-7 times. Have we arrived at a stage where we can start cherry-picking and maybe quadrupled?

A: If you come to the theory that cash is not going to be very helpful to you, that’s one theory that can help. It gives you some sort of a protection but over a 2-3 year period it’s a game to hold cash. You need to move into other kinds of assets.

The classic hedging against inflation is good which is not accessible to most people or the other harder assets.

Over the next 10 years, India’s economy will continue to do well. GNP will grow at 7-8%. Some of the great brands of India are available at a knockdown price. During inflationary times, brands that have pricing power are the key variable you want to look for in a business. It is not necessary to have physical growth because physical growth does not translate into profit for investors.

Look for a combination of a brand that has been beaten down heavily in this bear market and over the next 10 years the brand will remain alive. They should provide a certain amount of yield.

Due to the knockdown valuations India, a huge basket of MNC stocks all want to delist and there are companies that are offering buybacks across the board. So, you want to look there and have some safety of capital because you get a dividend yield. If the buyback comes, it is not necessarily the most aggressive strategy. But giving the prospects we see for equities this is probably a safety net to make sure we don’t lose big money.

Q: Buybacks would, in this kind of market condition, come at significant premium to the ruling price giving you an opportunity?

A: They do. A company that I used to own, GE Capital was at Rs 40. The buyback came at Rs 110. Lotte India is at Rs 200 and we expect a buyback north of that.

I had purchased I-Flex at Rs 2,600 and the price is now Rs 1,600. I am not recommending all of these stocks. But if and when they come in, they will be at a premium to market price because there is an interest for the promoters to de-list the company. So, they will tend to be a bit more generous to what the pay offs would be than normally.

Q: When you talk about brands though, the common perception is to go and look at the FMCG basket where you have the large levers of the world. But they are not necessarily cheap. How do you look at valuations for the large owners of the brand? Do you value them as a business and then say ‘as a business with that kind of brand power this is still going for a song’?

A: Take the beer industry for example: Anheuser-Busch recently got sold for a USD 52 billion market cap. It owns 50% of the US market and is growing at 2%. It is a very mature market out there. Look at the brand in India that has 50% market share. It is available for USD 750 million market cap, and maybe USD 1.5 billion in terms of enterprise value in a market that is growing at 12-15%.

So, sooner or later beer is going to be available in grocery stores, and per capita consumption is growing ahead to India. They have pricing power because of the brand. You always order the brand that you want. So, that offers a set of values to investors.

As a contrarian play for example, which is somewhat speculative, if you look at the airline business in India - airlines are closing down, capacity is being constructed and you will have pricing power because price is now reflecting the reality in India. Airline tickets cost what international airline tickets are costing.

The call is that oil does not go straight to USD 250; if it goes to USD 250 then oil is a bet. But if you think oil is going to correct, it is a contrarian bet. Airlines will tend to do well. You look at the great brand name in the airline industry and one name immediately pops up to mind. So, investors of course will do well. Expectations are zero. Investing is also about expectations. Investor expectation is about zero in that kind of a business. So, those kind of things will give you opportunities.

Q: How do you rate this bear market compared to the last two that you have seen? Is it looking as vicious because there is hope that economic growth is still quite robust? In relative terms, this may be a short-lived shallow one. How do you think this might pan out compared to the last two that you saw?

A: Somehow we always get shaken within a bear market. I was shaken in 1992. I was shaken in 2000 and even though you are more mature and more ready for it, I think last Thursday when the market had that vicious fall I was also shaken looking at the screen and not understanding what was going on, even though you felt that this was going to happen.

So, it is never easy to get out of a bear market. The thing that worries me more about this market is that we have had global bull markets, a synchronised bull market in global stocks where extraordinary amounts of wealth has been created. We might go into a period of wealth destruction and want to protect ourselves against that.

The key thing for investors is how to protect the wealth that they have accumulated in the bear market. There is no point making 10 times your money and giving it back in the bear market. Sometimes there is a flight to safety. From a period of global wealth creation we might be in a period of global wealth diminishing and the idea is by buying the brands, buying the MNC candidates or buying the stocks that are really cheap and being patient about them is to try in some semblance protect our wealth.

Q: When you spoke about gold in India, how do you approach it? Do you buy a gold ETF or physical gold or buy some of the mutual funds that are offering gold mining companies?

A: There are a variety of ways to do it. To be perfectly honest with you, jewellery sales in India plummeted completely as the price has gone high. So, it is not that Indians used to see that great demand for gold. But my call is that gold will be a more useful asset class globally for people because there is some sort of discouragement with paper assets, the way Fed has been printing money and the way Fannie Mae and Freddie Mac in the US that are paper assets that have been completely demolished in value. We are talking about bankruptcy or bailout for these companies. People’s faith in central banks and in paper is going to diminish over a period of time.

I think no one takes Ben Bernanke seriously. The last Fed chief that had any praise was Volcker (Former Federal Reserve Chairman Paul Volcker) who broke the back of inflation.

Bernanke famously said that he would print whatever money needs to be done to solve the problem. He may do that but that leads to inflation and again leads us to the conclusion of hard assets of gold being symbolic.

In 1979, gold was at USD 900 and the Dow was at 900 and you could switch one for the other on a par basis. In terms of the Dow, gold goes to 20, but we are now at 14. A lot of literature suggests that gold is undervalued and that in terms of Dow will probably get higher.

But as an insurance portfolio strategy there is a hedge maybe putting 1-5% of your portfolio in gold in terms of an ETF or mutual fund. I would consider it.

Q: What would surprise you more in the next three years: gold going to USD 2,000 per ounce or the Sensex going to 25,000?

A: I would say the Sensex to 25,000 would surprise me tremendously.

Q: You have no doubt in your mind that we are sitting in a bear market today?

A: Technical evidence is very clear-cut. I could be wrong. In markets there is no guarantee. But all the evidence suggests and all the people I listen to suggest that we are well within a bear market.

The tipping point between bull or bear market has long since gone. We are in a period of pain. To translate that into profit, we have to start thinking intelligently again.