MARKET RADAR

2009 will be the Year of Sowing: Udayan Mukherjee

I am not going to talk about 2008. Let it remain a blot, a wound which time will heal. Let's look forward. As anyone who has watched CNBC TV18 this last one year would know, I have been extremely skeptical about the market through most of 2008. This has incurred the displeasure of many of our guest experts and our more bullish viewers. Well, bear markets don't make me happy either. Believe me, a bull market is good for everyone and that includes me and CNBC TV18. Yet, my job is not to be in denial and say what I hope will happen, in the process misleading viewers, but to say it as I see it. And through 2008 all that I could see was ugly, in deep shades of red. But now with twelve months of the worst bear market behind us, I begin to grow a bit more hopeful. No, hold it there. This is not another ever optimistic broker or permabull fund manager telling you to buy because of a vested interest. My only interest is your financial health, the reason why I haven't, at any point post January 2008, thumped the table with any bullish conviction. Because it just didn't seem right.

So, am I now saying 2009 is a bullish year for the stock market. Not exactly. I think it will be Year two of this bear market. The reason why my piece is titled � The year of "sowing". Not reaping. Reaping, I suspect will have to wait. So ladies and gentlemen, before you read on any further, please ask yourselves if you belong to the breed which is playing for the big trade. The trade where you buy IN a bear market when "most" of the price damage is done, so not quite at but reasonably close to the price bottom and then patiently ride out the excruciating time correction to reap rich dividends when the market turns again. I am talking to the investor here, not the trader. And ponder before you reply in the affirmative because this trade is easier said than done. The market will test your conviction. Many will wait for a while and then throw in the towel. The market, as is its wont, will collect many impatient scalps before it turns. But turn it will. Everything does.

But first things first. Bear market investing or the Big trade as I call it, is not about relative returns. Neither is it about hiding in a stock or sector which falls less than other sectors, or narrowly beats returns from a Fixed Deposit. All that is for institutional investors. As an individual investor your priorities are different, or so I hope. If you want to hide in a defensive stock, that's fine but that's not the Big trade. For my money, if you want safety, be in Fixed Income. A reasonable Gilt fund will probably still get you double digit returns. Take that rather than buying HUL at 25 PE. The extra risk is not worth it if all you want is 15% by the end of the year. By all means take an asset allocation call but what you earmark for equities should be allowed to play for multiple returns on the eventual return of the bull market even if that entails making nothing for a year. The big trade is not about planning cash flows for the next 12 months. It�s about forsaking near term gains, waiting patiently when others make their 10% a year and then trebling your money in a relatively short period of time. So if you are up for it, read on.

An important caveat. I have no idea what the best time to buy is or will be. The bottom, for all you know is already behind us, though I am disinclined to believe that. I could be entirely wrong. If you ask people, they will tell you that the market will be weak in the first half of 2009 and then there will be a recovery in the second half. Yes, that is certainly a possibility but the more I hear this the more I am inclined to believe that the market will turn this consensus on its head. For one, it's too pat. It's never that easy to time the end of a bear market, almost never. Who knows, there could be a magnificent rally in the first bit of the year and then a collapse, that too is entirely possible. Markets always surprise. So the short point, I don't know what the exact sequence of the twists and turns of 2009 could be and I suspect no one does. The reason I prefaced this by saying this is not for the trader. My only assumption, admittedly a dangerous one, is that there will be more falls in 2009. Falls which could take us close to the October 2008 lows, if not lower. Let's say, in that broad vicinity. At least once. That's when you need to be brave. The real recovery may only start in 2010. So say you buy in January or March or May, whenever this expected fall comes, be prepared to not see any gains for another full year or more. Till well into 2010. That's a very likely scenario. But ask yourself this simple question: if you buy something for X, and then it becomes 2X in 24 months, you would still take it, right? Even if the returns are back ended, meaning you make nothing for 15 months and then suddenly a lot in the 9 months that follow. That's a 40% compounded annual return, tax free and you could get luckier. Fortune favours the brave, haven't you heard? That my friends, is the big trade and it lies somewhere in the depths of despair in 2009. Or so I believe.

And there will be despair in 2009. No bear market, certainly not one of such monstrous proportions, gets over easily. There will be pain in global economies and India, while not in recession, will hurt too. While acknowledging this pain, don't get into the trap of wallowing in all that drivel about how the world has changed because investment banks like Lehman went bust. Yes, that may temper the flow of liquidity for a while but finally money will come around to chasing growth and returns. The conduits may have changed and in turn the near term velocity of money flows but money will come. And with the kind of monetary and fiscal stimuli that are being put in place by most countries there is no dearth of money. You just can't see it today. So while the world has genuine problems today which are not to be dismissed or scoffed at, don't let all that blind you. Eventually, economies and asset classes will be reflated again. You have to believe that at a very fundamental level else you shouldn't be putting a dime into equities. There's one caveat and it is also the central risk to my hypothesis that starting 2010 things are on the mend again. That, despite all the stimuli, global demand just does not pick up, asset prices remain depressed for several years like they did in Japan and we don't get a meaningful bounce even in the next many years. This is certainly not a ludicrous proposition and in the US one can even believe it may happen but I struggle to envisage it in countries like India and China. A multi-year demise of demand. If that happens, I am proved wrong and we are all dead meat anyway. I am a believer. Yes, even after 2008, I am.

Okay then, for the Sensex and Nifty watchers, what does the turf look like? Again, my humble submission: I have no clue about the sequence of moves in 2009. The one thing I believe in is that you will get dips in 2009 and the ideal buying zone for me lies in that band between 6500 to 8500 points. Obviously, the implicit assumption is that the index will dip into that range next year, maybe even spend time within part of that range. Now could the Sensex rally to anywhere between 11000 and 12500 points before that happens? It certainly can. The window is wide open for such surprises. The thing about bear markets though, and we are still in one, is that they tend to be kind to stock buyers. They turn back, repeatedly, to test the lower end of the ranges formed. So the trick is not to get sucked into the rallies but to wait for the selloffs to accumulate what you like. Again, the central risk to this strategy is that the market has already formed a bottom in 2008 and does not turn back in 2009 to even touch 8500 Sensex or 2500 Nifty. It can happen but I would be surprised if the lower end of any bear market consolidation range is substantially beyond 9000 Sensex or say 2800 Nifty. Now I know all that wisdom about how one should not look at the index and only at stock prices but inevitably we all look at the index and it does impart a broad sense of where we are so that's that. The way past bear markets have panned out is that the index first forms a capitulation bottom (whether Oct 2008 or one to come in 2009) and then forms a multi month trading range. In the last bear market the Nifty made a bottom of 850 points in September 2001. Then it had rallies and sell offs, in the process forming a 17-month trading range that held till April 2003. The lower end of that trading range was 950 and the top 1200, but the last 7 months of that range was a tighter 950 to 1100. History should never be ignored. So one possible scenario could be that the Sensex makes a bottom around 7000, give or take a few hundred points either way, and then forms a broad multi month trading range of between 8500 and 12,500. It could be narrower of course. The eventual piercing of the previous bull market top of 21000 may take much longer. Who knows, it may not happen before 2011. But even if the Sensex formed a range in 2009 after bottoming and then 2010 and 2011 turned out to be positive years leading up to a new bull market, that should surely be an acceptable outcome for most investors.

So how do you position yourself as an investor? First, identify the amount of money that you are ready to forego for the moment and then don't approach investing with the sole purpose of minimising losses. The defensives will help you hide while the market consolidates but will never generate the supernormal returns that you are playing for once the bull returns. No, that doesn't mean you have to rush out and buy the next real estate stock. That's ultra aggressive. But you have to focus on the businesses which will exhibit growth once this lean patch is over and bet on them when the market gives you that opportunity in 2009. And in doing that don't look back. History may repeat itself but bull market leaders seldom do. The problem is that, sitting right in the middle of a bear market it is difficult to identify what the next leader sectors would be. Maybe the leaders of the next bull run are still not adequately represented in the listed space. How many listed realty stocks did you have after all when the last bear market was ending? None. But leave that aside, as it's a hidden paradigm today. The last bull run was fairly secular in that sense, not a one trick pony as the one that preceded it. Real estate, commodities, banks, infrastructure were all pillars of the last bull market. So one hopes the next bull run will also be reasonably well spread out so that it doesn't exclude large sections of participants. Maybe banks will not suffer as badly with their asset quality this time round and present buying opportunities; maybe the pessimism of a drying up of the capex cycle will bring infrastructure stocks to irrational levels, maybe post elections sectors like agri, fertilisers and sugar will recover yet again. And anytime gold sells off close to 700$ buy a brick, it will shine brighter than most over the next couple of years. Keep watching closely. Even the worst hit cyclicals will turn sometime in 2010, I hope. Yes, you will have to take risks and look beyond the relative safety of existing cash flows. The big trade is all about that.

There, I have stuck my neck out. More pain but a bear market bottom sometime in 2009, then a consolidation range that extends into 2010 - the point where it may seem hopeless but when the next bull market starts slowly. I know you will smile indulgently at me if it happens before that because we will all be happy again then. Just remember 2009 is a buyer's market. Let stock prices come to you, don't go chasing them. That was 2007, this is 2009. Horses for courses, as they say. Be brave, be stingy, be patient. You won't lose your shirt buying at the lows of 2009 or even at the lows of 2008, at best you will be made to wait longer than you would like to. So as the sun shines tomorrow on a New Year, maybe shift a gear in your head. Who knows, 2009 could be a year of opportunity. Of toiling under the sun and sowing the seeds of wealth creation. You may not see the harvest this year but the hard work will bear fruit in the not so distant future. Keep the faith, this too shall pass. Here's wishing you a healthy, safe and profitable 2009.