Pick a Side: Bull or Bear in 2016?

Dec 29, 2015

In this issue:
» How dull is the investment climate in India?
» India's premium to the MSCI index
» ...and more!
Devanshu Sampat, Research analyst

2015 has nearly come to an end. It was an eventful year for the Indian markets. We saw a major tussle between the bulls and the bears this year. The result was the benchmark indices didn't move too much. It was the smaller stocks that took centre stage. The action in the primary market was red hot.

Looking forward to 2016, I thought it would be a good idea to present both sides of the story.I've put together a conversation between an optimistic bull and a pessimistic bear. Whose side are you on? Let us know.

Bull: The prospects for the stock market in 2016 are shaping up very well. Don't you think so?

Bear: I'm not so sure about that.

Bull: Why not? There are so many reasons to be positive.

Bear: Really? I think there are many reasons to be negative.

Bull: You are always negative. A broken clock will show the right time twice every day. But that's meaningless. 2016 will be a good year for stocks. I am certain.

Bear: Well, I think you're always positive, and that's not a good thing. Just because you've made money the last two years doesn't mean you will do well in 2016 as well. I have good reasons to be negative. But first, I want to know why you're so positive about next year.

Bull: Alright then. Three quick points will make my case clear. First, sentiment has improved a lot. Just look at the number of retail investors in the markets these days. A lot of people are making money, and that's a good thing. Don't deny it.

Second, India's the top destination for FIIs. We all know it is the foreign money that drives Indian markets. They have to keep pumping money in to India if they want good returns. China is slowing down. Brazil has been downgraded to junk. Russia is in the doldrums. Europe is a mess. Where else will they go if they want to invest outside the US?

Third, the economy is recovering. Even the usually cautious RBI governor admitted it after the last monetary policy meeting. He is cutting interest rates because inflation is down. Projects are receiving speedy clearances. The government is focused on developing physical infrastructure. Big programs like Make in India, Skill India, Digital India, and the soon to be launched Startup India will start contributing to economic growth next year. Once the GST bill gets through Parliament, the sky will be the limit for the markets.

Bear: Very impressive. But I'm not convinced. Listen to my three reasons now. It's good that many retail investors are making money. But it is true that, historically, they have been late to the party. If many retail investors are making money easily, it usually means we are close to a market top. Besides, valuations are not very comforting right now.

As far as FIIs go, we all know they can change their minds at any time. There's no guarantee that FIIs will not panic at the first sign of trouble. And I've already noticed trouble brewing in the US junk bond market. If things get out of hand, I think India will not be immune to the aftermath.

I don't agree with you as far as the economy is concerned. Inflation is down only because of the crash in commodity prices, specifically crude oil. If the US shale gas boom goes bust next year, crude prices could stop falling and maybe even start to rise. Will the RBI keep cutting interest rates then? I don't think so. As far as the government's big schemes are concerned, they are all long-term in nature. I don't see any reason to be optimistic about them right now. All things considered, I believe it is better to be negative than positive.

Bull: I stick to what I said earlier. You are always negative. I'm sure there won't be a market top next year. Stocks will go up. I will make good money, and you won't.

Bear: We shall see.

Will the Bull or the Bear triumph in 2016? Do let us know your comments or share your views in the Equitymaster Club.

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The year gone by has been quite flat for Indian equity markets. While the Sensex is down by 5.7% in the year till date, the BSE 500 index fell by 2% in this period. Considering that the expectations built in were quite strong as the markets were hit by positive sentiments towards the end of 2014, the fact of the matter is that the reality disappointed the market participants. The 'overweight' consensus that the Indian markets enjoyed at the start of 2015 took a toll as the year progressed. Not to mention that the earnings have not yet revved up as expected.

Having said that, the expectations are still high - as gauged by valuations. In both absolute and relative terms. The price to earnings ratio of frontline stocks continues to remains above the long term average. As per business daily Mint, when compared to the MSCI index (ex-Japan), the Sensex commands a premium of about 5 in P/E terms. This stood at about 4.6 in April and about 4 in May this year. It went to as much as 6.8 in August before narrowing to current levels.

Given that the financial performance of India Inc is at its worst in many years, the expectations of a quick revival is what is keeping the markets afloat. Return on capital employed and asset turnovers are at their worst in many years. As and when the economy revives, these parameters will definitely improve. But the key question as we go into 2016 is how long investors will remain patient.

3.40 Chart of the day

How dull is the investment climate in India? Well...here's one way of gauging it.

As per the Centre for Monitoring Indian Economy (CMIE), an average of 530 projects were announced every quarter a year after the millennium. The figure went up to as much as 1,340 for the period between December 2009 and September 2011. However, the latest data indicates that the number has come down to levels of 600 for the year gone by. The number averaged to 590 for the past three years, giving an indication of how bad things have been for a while.

Speaking to the media a few weeks ago, the MD and CEO of CMIE did state that the new investments till quarter ended September came in at Rs 3.5 trillion were announced by the government and private sector. While this figure was much higher than the corresponding period of the previous year, he did state that this amount included the blip on account of a big investment show in one of the states. On excluding the same, the figures did not look very nice.

Today's chart of the day gives an indication of the trend in the new projects announced over the past fifteen years.

The investment climate is dull

As you can clearly see, the situation has remained dull for a while now, with the figures being closer to the lowest points of this period.

The following chart provides the trend between who has been investing - the government or private sector. Please note that these are only quarter ended figures.

Share in New Projects

While it is expected for the government to lead the capex cycle revival in India currently, the fact of the matter is that the private sector has played a bigger role during the boom periods. With utilisation levels still far from comfortable, it does seem that the expectations from the government and its impact on India's capex revival may be a little too stretched.


At the time of writing, the Indian equity markets were trading weak. The Sensex is down by about 28 points. Stocks from the mid and small cap segments were not in demand as their representative indices were trading lower by about 0.3% and 0.4% respectively. Realty and FMCG stocks were least favoured today, while those belonging to the automobiles space were in demand.

4.50 Today's investing Mantra

"Acknowledging what you don't know is the dawning of wisdom." -Charlie Munger

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).

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Equitymaster requests your view! Post a comment on "Pick a Side: Bull or Bear in 2016?". Click here!

5 Responses to "Pick a Side: Bull or Bear in 2016?"


Dec 30, 2015

High PE ratios of india Inc.stocks, Not so attractive performance of companies, Passive and paper tiger govt, FII focused market sentiments, Not so spending but saving and thrift minded wealth owning class, fall in gold prices , Alarming dept equity ratios, Skyrocketing NPA's of indian banks,Unethical and not so transparent managements are all showing that the direction of the market is towards deep down south.Invest with Caution is the watch word.Small caps and midcaps returns are Marisa deer
( in Ramayana to cheat ).That is also an indicator that the market will crash in 2016 may be to a new low.



Dec 29, 2015

Bear followed by Bull



Dec 29, 2015

Sir, Considering slow pace of economic reforms, pressure on exchange rate, rising and gradual increase in oil prices, moderated rate of inflation, additional fiscal burden due to 7th pay commission, large outflow of foreign funds from equity market, increasing public expenditure with no corresponding increase of private investment expenditure etc are indicators for bear biased market at least till March 2016.

Thanks with regards



Dec 29, 2015

Bear has got nothing to do with india atleast for next five years. the world bank,imf & other world agencies foretelling 7%approx gdp growth and investors around the world flocking to india,to grow along with india. only indian blackmoney holders may sell through participatory notes to bring down the equty markets and to whiten the dark earnings.THE INDIAN GOVT.immediately stop this sharp practice of using P E notes and take appropriate measures to check conversion of black to white both in india & abroad hawala. now to markets, electric genarating cos & oil exploration cos may not have good future,think oneday our villages rooftops full with solar cells may sell excess current to cos for industrial use.this is the benefit of suryanamaskar.This is enlightenment & earn from enlightenment.Avoid Bhel,powercos,oil cos,hanging theory of20 doller barrel,good savings in foreign exchange.Beware Baba Ramdev brand will sweep all mnc fmcgs to run for cover.New Indian MNC will find worldwide visibility including Business Baba. one can find alternative to power&oil but not for steel and cement. there is greatest discount(online)offer of Tata Steel Acc Ambuja & overpriced Ultratech.Positional Investors for two years.Unlike 70s&80s Blade&Letterhead cos may not make quick money as investors are well informed but my only worry,how co*s in collusion with SEBI charges huge premium for IPO for new investors to find the market price half of there investment on listing.this is not book-building process, it is placing money trap process.I suggest Supreme Court should enforce penalty on SEBI not less than Rs one crore whenever Ipo Investors are cheated and ask cos to refund excess premium charged with penalty to investors. Now World Investors find BHARATHA BAGYA VIDATHA. THANK GOD FOR GIVING US NAMO WHO SINGULARLY CONTRIBUTED TO MAKE THE WORLD LOOK AT INDIANS WITH RESPECT AND READY TO INVEST IN BHARAT. EVEN US PRESIDENTIAL CANDIDATE DONALD TRUMP INVESTED IN PUNE,LONG BACK.ALL DEVELOPED COUNTRIES HAS NO OPTION THAN TO LOOK AT INDIA FOR THEIR OWN GROWTH.NRIS OF THE WORLD,STARTED BRINGING BACK THEI HARD EARNED MONY NAME &FAME TO ROOTS. THIS IS SUBHSANKETH,GOOD OMEN THAT THE ONLY ANIMAL WHICH CAN RULE THE INDIAN STOCK MARKET 2016 IS BULL BULL AND BULL ALONE.ALL OTHER COUNTER ARGUMENTS OPINIONS ARE UNADULTERATED BULLSHITS.

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Dec 29, 2015

I am on the Bull side because I can find various positive things in the present central government policies.

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