SAMAVAT 2068: Can this Diwali spark a bull market?

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Last Diwali, at this point was almost where the market tipped over. That was when we started treading the bearish patch or went into the supposed bear market. At that time, we were high on Nifty at 6300 and 21000 on the Sensex. But since then, it has not really been a great year. Despite the rally of the last few days, we are still down 20% on the Nifty even as other asset classes have done very well- gold is up 20% and crude is up 25%. The dollar was Rs 44 then, it is Rs 50 now. So it's more of a mixed bag for the markets now. Let's ask experts if this Diwali is a turning point once again in ushering in better things similar to the reverse last time.

The guests on the show include Manish Chokhani, N Jayakumar, Samir Arora and Akash Prakash.

Below is the edited transcript of the discussion. Also watch the accompanying video.

Q: Last Diwali we tipped over. Anything tells you that we are at the bottom right now or is there more pain ahead before the inflexion point comes in this time?

Chokhani: Sentiment suggests a bottoming process but classic market cycle will suggest a final capitulation because of events which are unknown as yet and largely lie externally. Although I must say we have been hitting quite a many self goals in the current year. Normally, markets then make a rounding U-shape bottom before they go back up and test it, before starting the next bull market. So we are sometime away from the next bull phase, but just as whatever you did in 2007-08 made you look very foolish, three years later, I suspect anything you do in next three-six months can make you look very smart.

Prakash: I think it will take some time. The 2012 calendar would be a good year for India for various reasons- interest rates, commodities going down etc. But I agree with Manish that I don't think it's an inflexion point today. You probably got three-six months at least till the budget of 2012 for the market to form a long extended bottom. I would be buying and I think you buy slowly over next three-four months. Buy specific stock; I don't think there is a rush that you have to go and buy everything today. You will have enough opportunities. It going to be a very volatile market, partly for our own reasons, partly what's happening internationally and you should use the volatility to come in and build positions in companies you like.

Q: But could this Diwali coincide with a sharp bear market rally globally? Have we seen the start of that? Could it extend over next few days?

Arora: That could extend for a few days. But I continue to be sort of relatively bearish over a slightly longer period in the sense that it will be a tough grind. India's secular story has been spoilt a little bit, although cyclically we may get a rally next year because of interest rates declining and hoping that commodity prices will decline.

The story has been sullied quite a bit and but we can still have a rally. The rally may still come next year either because of relief from European issues and our interest cycle pausing. But that would still be a cyclical rally for 10-20%. Days seen during 2005-06, 2007 have gone for next many years.

Q: I have kept you for the last deliberately Jayakumar. I hope that you will be more bullish than the other three participants, are you?

Jayakumar: I am sure the participants aren't bullish. Everybody has got a different time frame to talk about. Akash as a fund manager needs to be cautious and therefore needs to build up his purchases over a period of time. The way I see this is that markets don't afford that luxury usually. We are advising our clients is to be fully invested at this point in time.

There could be changes and our strategy is stay as far away from government regulated spaces and be a lot more focused on stock specific stories. Individual stories rarely outperform in a very deeply bearish market. But in a sideways market one will find a lot of stories coming up. We have not been fortunate to get the jubilant of the worlds this year. But I dare say that if we choose our portfolios carefully, there are a number of things which allow the luxury of investing even aggressively at this point in time.

The gratification may come over a period of time we can't really time when grounding bottom will complete itself. My own assessment is that, India has underperformed for better part for this year. Government finances, government policy and government initiatives went into tailspin. Right now I believe in being stock specific, especially if one believes some tailwinds can develop, will make us invest and invest fully. I am not able to take a call on the index, more and more we feel, 'less and less convinced about looking at the index and taking an investment call.

Q: Bear markets are always characterized by very big bear market rallies. In the last one year we have seen 10% kind of rallies but not those magnificent things. Could one be in the offing which takes nifty to 5,700-5,800 which would surprise most people at this point?

Chokhani: It is likely and bear markets rallies could be as high as 30%. The feature of these rallies is that it fools a lot of people to think that the new bull market has commenced. That is what ends up trapping people, then as the market grinds down lower, which is why when you come back to the beginning of the new phase when interest rates are low, liquidity is available in plenty, actually no one wants it because everyone is so wounded and finished.

They have lost confidence in themselves. It is not unusual. We have gone through cycles like that over the last 20 years at least on three occasions. I don't see this as a very different cycle. Usually the leader of a bull market which in our case was commodities and BRICS doesn't lead the next cycle. It is often met with revulsion at the final stage. Just as in 2002-03 no one had any technology, TMT shares in their portfolio. It is possible at some point people say all this BRICS was a big tamasha and we have got trapped in the ETFs raised all over the world. We came to this country for growth; there is no growth and no governance.

That creates a lifetime buying opportunity all over again for people like ourselves. In the interim like you will have to stay stock specific. To me it seems like a repeat of 1995-97 period, where we came out of the first emerging (EM) boom of 1994 and kept grinding away until the Asian crisis finally erupted in 1998. In that sort of period I think all the four people on this panel did really well for themselves, while the market was going nowhere, the index was just +/- 3%.

It's also a period I remember very vividly because index earnings were Rs200 from 1996-2001, six years. Lot of people take for granted Indian earnings compounded 15%, GDP will grow 15% and nominal earnings will come. It's possible to go through periods like that and still make money. So that is the message of hope, forget about index, focus on stocks.

Q: But do you think that it is likely that two-three years earnings could plateau out from here?

Chokhani: It is possible and we have even seen in 2007-08-09 earnings were trapped at Rs 800, so it not unusual.

Jayakumar: In fact the greatest paradox is that as the commodity prices have moved up, our index earnings have kept pace. So much as you would like a commodity derating and the revulsion towards that space coming in the form of prices. But its interesting to point out that earnings have kind of hit their lows and it may continue for a bit. That shouldn't take your eyes off the investment ball.

Q: Do you think that this revulsion towards BRICS could come to that India being unloved as it is over the last one year, gets even more unloved with the passage of time because of issue specific to itself?

Arora: In last one year India has not been totally sidetracked or ignored so it will have to do much worse to be totally forgotten about and revulsion to take place. But in general I totally disagree with what Jaykumar is saying that you find stocks and therefore it's a good thing.

That way no advice needs to be given to anybody on anything. All you need is that you be right. The point is we are talking in general and not about somebody who gets every call right and every stock right.

In India we have shot ourselves, scored self goals, or another new on which added recently not missed any opportunity to miss an opportunity. We should all stand up and say to our system and government that it is our fault.

It is not the fault of Europe, US, which is being blamed for our problems, it is our problem. Even in the face of those problems, those markets are doing well. The economies are not doing well but there seems to be support and encouragement for stock market investors.

Nothing like that exists in India but I still believe that the next year we can have a rally. That maybe because this year markets have gone down and interest rates have been taken to such high levels that when somebody corrects that error then we will have a rally for a few days or few months. That may be sharp maybe worth 20%.

But if we are all going to believe that next year there will be a 20% rally and then there will be problems because elections will come near and politics will take over then that is not a story for retail investors. It is a story only for fund investors because for us it is a job. Whether the assets are less or more that job has to be done therefore we have to be committed to that market.

But the rest of Indians will first walk off before the foreigners walk off. Foreigners still have less choice in the world and it is job for many of them, so they will come to India. But Indians invest out of choice. Either way we should not just make it look that everything is okay because we are all Indians, which we all are.