Current ‘bear market rally’: A good exit opportunity?

“The days of rapid financial wealth creation are over. We're now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances.”
                                                                                     - George Soros

CNBC-TV18's Research Analyst, Haresh Soneji

Investors the world over would pray unanimously hoping legendary investor George Soros is wrong, this time round. But, then he is not the only one hard talking. The Sage of Omaha, Warren Buffett offers similar advice. At his AGM a few weeks back, he said he would be happy with a single digit returns from equities in the coming decade. But wondered even that was possible. For argument’s sake, two visionaries could be terribly wrong. Well, that’s what investors hope. But, given their history it seems unlikely. And if that were not enough, various brokerages are sprouting with reports every other day that show case a not so rosy picture for global equities. If they are all on track, the current rally in the equity markets the world over, seems more like a ‘bear market rally’. And if it is indeed a ‘bear market rally’ then is it a good exit opportunity? For all practicable concerns, the answer seems to be in the affirmative.

For one, my previous column (Global concerns at near high, Read here:
http://www.moneycontrol.com/india/news/market-outlook/global-concernsoil-food-etc-at-near-highs/12/27/337859) argued on global concerns that seem to be ignored. Inferring from which, the current rally was more like a house built on a pack of cards, which could just collapse. This indeed is a big sign for institutional investors. Smart money is therefore already started moving out. Consider the ownership data for the Mar ’08 quarter. FIIs have reduced exposures and promoters have capitalized by exiting, whereas domestic players including retailers have bought into the current market. Further, FIIs exposures in non-large cap counters were reduced more aggressively during the Mar ’08 quarter.

Agreed that since 1991, FIIs have been net negative in any financial year only once in India. Things have not reached such drastic levels, but higher churn and movement to value stocks is evident. There is increasingly a growing effort to reduce risk as fast as possible.

Having said that, another concern is that flows into the Indian equity market are not increasing relative to other markets. The latest Morgan Stanley report has an underweight to India. In fact, India is the biggest underweight market on their radar. India is expensive and at current levels is trading at 18x one year forward, considering a 15% growth in earnings. With earnings growth declining and also earnings quality, FY09 would most likely see a 10-15% rise in earnings – more likely towards the lower end. No wonder, many investors are not comfortable.

But perhaps George Soros can explain this profoundly through the following statement. “Since the 1980s, the global financial system has been dominated by an ideology I call market fundamentalism - the idea that markets are perfect and regulations are always flawed. But markets aren't perfect. Left to their own devices, they always go to extremes of either euphoria or despair.”

The euphoric phase seems to be behind us. Perhaps, the despair stage is where we are headed. But, no one is talking about it now. At best, experts would say markets are likely to be range bound. In the board rooms, however, concerns have already been briefed and alternatives being worked upon.

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.