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The Bull Story... - Views on News from Equitymaster
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  • Nov 5, 1996

    The Bull Story...

    The bad thing about being different from the rest of the crowd is that you get noticed. The good thing is that you still have a 50% chance of being correct. Just because experts say that the market will rise does not necessarily mean that the market will actually oblige the wishes and calculations that are so happily churned out on our Pentium-powered laptops. No, markets have this terrible habit of humbling the almighty, of cutting across all educational qualifications and levels of wealth and, yes, even geographical and cultural boundaries. Many have fallen victim to the independence of the market and many more are destined to be levelled in the future.

    Having prepared my obituary and warned you, the reader, about the risk of making a prediction I am all set to make one - knowing that I have a 50% chance of being correct and a 50% chance of being ridiculed: The BSE-30 Index is set to start a bull run.

    I have been negative on the country and our stock market ever since the eventful fourth quarter of calendar year 1994. Among the events responsible for my pessimism was the action of the Unit Trust of India and other financial institutions who decided to support the merger of Reliance and its twins and lost the right to be custodians of our wealth. All of us in this business make mistakes (remember we all have a 50% chance of being wrong) but till today I have not heard a single financial institution admit that they made a mistake on that transaction or take steps to correct that wrong - that is the unforgivable part which strips these benefactors of government support and legislation of the right to manage our money.

    Another reason for the pessimism was the loss of the Congress in state elections in north India in October, 1994. The economic ramifications of that move took its toll on the stock market. The Congress party chieftains, out of touch with reality, blamed their loss on rising prices and clamoured to get the central bank to bring inflation down to levels which could ensure a Congress victory by the time of the next general elections in 1996. The 50% factor again went to work: yes, the Reserve Bank of India did a fantastic job and inflation fell from a level of 12% in end 1994 to 5% by mid-1996 but, alas for the Congress, they still lost the elections.

    And we, the investors, lost our shirts. Between end 1994 and mid 1996 the stock market fell by nearly 35% largely because the Reserve Bank had dramatically slowed the pace of money creation - that crucial ingredient needed to keep the economy going and, yes, even keeping the stock markets going. The rate of creation of money fell from 22% per annum in FY95 to 14% per annum in FY96 - also a fall of nearly 35%. See the correlation between money supply growth and stock market performance? It is not a direct one-is-to-one relationship but it illustrates the point - take money out of the system, and share prices will tend to go down. Conversely, put money back in the system and share prices will tend to go up.

    It is this one factor of money being shovelled back into the system on which I am happy to go out on a limb and take the chance of being 50% right. Between March 1996 and September 1996 the central bank has made it very clear that it wants interest rates to be reduced. Not a month has passed in which we have not read an interview given by a Reserve Bank official stating that time is ripe for a decline in interest rates. But no one listened. Finally, the credit policy announced a month ago did what the Reserve Bank stopped doing since end 1994: it began to create more money for the economy - and the stock market.

    The foundations of a bull run have been laid and there will be a lag of maybe 3 to 6 months for the benefits of increased money creation and lower interest rates to percolate down to the smallest level of companies within the economy. But stock markets move on anticipation of an event, not the event itself. My gut feel is that the "sattawallas" will get back into a positive mood by January 1997 - well before the small companies begin to see the benefits of lower interest rates. The FIIs and the research analysts who are now so negative on the Indian markets will visit Indian corporates in January 1997 and will all come out with Big Bull Buy reports after the market has taken off.

    My call on this impending bull run is based on one factor alone: the increased printing of notes by a central bank operating in a political environment of a 13-party coalition which is keen to prove that a hotchpotch of parties can also preside over an economic boom. The spill over into the stock market boom is not the intended effect but a side-show.

    Just as Rao and his Congressmen were keen to kill inflation on the hopes that this will lead them to electoral victory, Gowda and his platoon are keen to prove that they can get GDP to grow at 7% - a goal which needed the Reserve Bank to loosen its purse strings. Inflation will rise from a low level of 5% to an affordable 8% averaged for the year and maybe even 10% on a point-to-point basis. The beauty is that, unlike the Congress who HAD to face an election, this coalition DOES NOT WANT an election so inflation is not their concern - growth is.

    So despite all the scandals of St Kitts, Jain diaries, JMM, cobbler scams, Reliance mergers, Reliance share switches, petroleum contracts, housing scandals, Ciba-Sandoz mergers, ITC- BAT professional robbery, and the dozens of other scams I may have missed out I am out there on a limb happy to call a return to profitable days on Dalal Street. Diwali may be over, but the fireworks are about to begin.



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