»The Honest Truth by Ajit Dayal

A man without love
23 FEBRUARY 2012

Most fund managers and investors are probably crooning the Engelbert Humperdinck song these days.

"Every day I wake up, then I start to break up
Lonely is a man without love.
Every day I start out, then I cry my heart out
Lonely is a man without love"

But, admittedly, the forlorn investors substitute their crying over theabsence of emotional love with the emptiness that rules their hearts from not being invested in the stock markets.

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When death means life
Just after SARS - the deadly respiratory virus that threatened to shut down global trade in 2003 - equity markets were in a free fall and India was in one of its typical "we must be a dead economy" moods.

A CIO of a respected fund house declared: "equity as an asset class is dead".
Basically, he claimed, no one would buy shares any more.
Bank deposits were where the money would - and should - head to.

I recall turning to my colleague, Subbu, and saying this must be the best buy signal we can ever hope for: a large mutual fund house is shying away from investing in stocks. Once there is some upward movement they will realise how wrong they are, and there will be a mad scramble. Their desperate buying will propel a bull run.

Well, India went on to record one of the most blistering bull runs till the Wall Street-induced financial crisis hit all of us in 2008. The BSE-30 Total ReturnIndex surged some 6x in that five year period from 2003 to 2008. Equity as an asset class was far from dead - even though it did get whacked by 50% after the Lehman bankruptcy in September 2008 only to surge again by March 2009.

GRAPH 1: Love is gazing into the future together.

So fast-forward to calendar year 2011.
India was a market where everyone loved to hate.
There was nothing to love: inflation, the grumbling of policy freeze from the feudal clans of India's industrial families, and global fears over the survival of Greece and the Euro dominated the headlines.

To top that heavy dose of bad news, there was the weakened Indian Rupee which was projected to go to hell in the proverbial hand basket.

I can hear the ghosts of the past: "India as an asset class is dead".

But, as believers in the cycle will know, after death there is life. Most investors have not had the good fortune of having invested in Infosys in 1992 or being gifted a parcel of land in what are now buzzing city centres - acts which would have released our caged souls and led us to the ultimate nirvana of never having to worry about our financial future.

With no "Infosys at IPO" and no inherited land, we are captive to the cycle of the markets.

I'm a believer!
Somehow, suddenly, the world went from being infidels to being believers.

Foreign buyers have invested USD 5 billion in 7 weeks, the INR has regained lost ground and - viola - the Indian stock markets are the best performing markets in Asia and the INR one of the best currencies to have owned.

GRAPH 2: Fools in love?

What happened?

Well, the short answer is that India's economy - while not growing at a racy 8% clip - was still one of the best performing economies in the world. And the "risk-on" traders decided to send some of the massive piles of money floating around the developed world our way.

The bears - those not in the market and singing Engelbert's song - are scrambling to buy in. The bulls - there were very, very few to start with - are gaining ground.

The India story of 7% rate of growth in GDP does not look too bad, suddenly.
And the PE ratio of 15x for March 31, 2012 expected earnings does not seem terribly expensive. Not cheap - but not expensive.

Great expectations
But while things look rosy for India now - and could get a lot rosier - there are real issues that still need to be resolved.

The results of the 5 state elections will swing the markets and India could head for a national election in the next 12 months. Much as we believe that politics is irrelevant in the long run, it can change sentiment. Don't forget the policy paralysis speeches of India's feudal industrialists who are finally being asked to pay market prices for crucial raw materials like coal, gas, iron ore, land, oil, and spectrum. These hand-in-the-cookie-jar captains of industry can influence what foreign investors think of India.

Greece has been rescued countless times and is still bankrupt; the Euro as a currency is still in trouble; and the US has massive future deficits to control. The world economy has another 3 to 5 years of pain and uncertainty to live through.

Iran is a wild card and Israel is determined to stop their nuclear program. Oil prices have risen and wild weather patterns can change agricultural prices instantly. Inflation, now under some control, could change course in a heartbeat.

So, like a couple that falls in love and moves onwards to marriage, there is ample room for certain disappointment.
But that reality check is for later.

Now, the world is starting to sing silly love songs about India.
For the moment, everyone is an India bull.And the erstwhile bears (now converted to bulls) need to buy - or their portfolio will be lonely without some stock market exposure.

Note how the analysts are already predicting an Index of 20,000.
A few more wild days of FII flows and they will start saying 25,000.

Hey, maybe they will even join the one-member, lonely hearts club band of 28,000!J

But that, my dear reader, is a danger.
When a man in love tries to get rid of his loneliness, the desperation for the touch and feel of another can make him do silly things.

For those lonely without love....look out for the dangers of lust.
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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.