Friday, August 19, 2011

Buy Fear : Just a Mini Bear, on way to 80000 Sensex

Posting after a period of nearly two years. However, still no change in my March 2008 estimates, where I was expecting the the Sensex to below 10000 levels within a year’s time and then go on to between 60000-80000 levels by 2016

My last post was in Oct 2009 when the Nifty was around 5000 levels, having risen sharply after the 2008 lows of around 2500. With the Nifty now at 4800 levels, we are now lower than two years back.

So where does that leave us ? A one line summary is that there is still no change in my estimates made in March 2008.

Buy Fear

Markets are going through a nice little fear psychosis, providing great entry opportunity for long term investors.

Can they go down still. Yes sure, the Nifty does have the potential to go down all the way to 4400 levels – providing another great entry opportunity.

The ride from current levels to around 60000- 80000 Sensex / 15000- 20000 Nifty by 2016 is likely to be a heady one. Of course, I expect the last 25-30% of the rise would be a buying euphoria driven by some kind of ‘Extraordinary Popular Delusion’.

Economies and Markets taking a breather

All the major economies came out of recession/ slowdown around the same time and along with that came a huge rise in stock markets. Indian markets rose by nearly two and a half times from their 2008 lows. Similar was the case around the world with US stock markets nearly doubling from their 2008 lows.

GDP and stock markets never ever go up in a linear fashion or in a straight line

Almost always the period immediately after recession has been followed by surge in GDP growth and a sharp rise in stock markets.

The next stage is what I call a breather stage with growth slowing down and markets taking a fear dip. Growth then picks up again and markets then make new highs. These fear dips are a good time for long term investors to accumulate their equity holdings.

The Mini bear

Ever once in while, with a gap of 2-3 years or so, the markets go into what i call a mini bear with a drop of between 20-30% from their most recent highs.

During the bull run of 2003-2008 the markets rose by over 6 times from Sensex levels of 3000 to the peak of 20000. This was on the back of consistent GDP growth rate of above 8% during the same period. But even that bull run was interspersed with at least two such mini bears with nearly 30% drops.

These mini bear’s could be triggered by any factor – growth slowdown/ dotcom bubble burst / stock market scandal/US Invasion of a country/Terrorist attacks / banking crisis in some other country etc. Typically, there are more than one such fear factors active simultaneously that trigger a mini bear. We are right now in a middle of one such, providing a great entry opportunity for long term investors. I also expect to be hit by another such mini bear before 2016.

How bad (or good) are world economies doing

Well, in term of growth and recovery, the developed economies are doing much worse than the many emerging economies like India. For the developed economies like US/France/Germany the April to June quarter GDP has slowed down to around 1% levels – ranging from 1.34% for USA to 0.0 % for France. That’s much better than the minus 8.9% for US in peak of recession but much worse than the 3.9% at peak of first leg of recovery a few quarter back.

If the slowdown continues, and given the already low levels of GDP rates in developed economies, it would hardly be surprising if their growth rates dip down to slightly negative levels. But I really doubt if a US GDP growth rate will go down to the minus 9% level.

For India, at peak of recession we were still growing at around 6.5% when the whole world was supposedly falling apart. At the peak of recovery a few quarters back, our quarterly GDP growth rate went up to almost 9.5%. Even if the current slowdown continues, I doubt if our growth rate will drop below 7%. For a slowdown, a 7% growth rate doesn’t really sound too bad.

What are some of the more pessimistic estimates

The Morgan Stanley report that spooked the market yesterday cut the global GDP growth forecast for 2011 to 3.9% from 4.2%, while saying that US and Eurozone were ‘dangerously close to a recession’.

Nouriel Roubini, widely called a ‘Permabear’ and who predicted the 2008 crisis nearly two years earlier (right down to detailed steps on how the crisis will unfold), says there is 50% chance of US dipping into a recession.

But all that is hardly surprising since the developed economies are already running at around 1% GDP growth rates, and over a longer term period they are expected to have a run rate of around 3%. A slowdown from these kind of low levels would very likely take them to negative territory. That’s hardly surprising.However I have not heard of any forecast of a global economic system collapse or of US GDP going to the minus 9% range yet.

As for India the most pessimistic of estimates are in the range of 7.5%. That again doesn’t seem too bad.

What would drive the growth in India

Over a longer term I would expect India to grow at around 8.5% rate if not more. The growth would primarily be driven by an ever increasing domestic consumption.

The growth demographics of India have continued to change, with a sharp rise in rural income as a result of programs like MNREGA and increasing consumption demand from Tier 2 and Tier 3 cities.That’s one of the factors that held our economy together during the 2008 carnage.

If infrastructure investments pick up, the pace of growth is likely to be even higher. I also expect many of the pending reforms to start to materialize, albeit at a slow pace. I have not even factored those in.

In Closing

Are there any risk to my estimates ? Of course there are, as are there in any forecasts. I can only forecast, I can’t see the future. However my subjective probabilistic estimates are more than 80% for these estimates.

Levels of 80000 on Sensex level and 20000 on Nifty do sound a little incredulous today. But that’s how Sensex levels of 20000 would have seemed in 2003 when the Sensex was quoting less than 3000.