Kotak Sec: Meaningful Minutes: Bull Market Predictions

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Bull Market predictions: Things to know before you rush in To say Rakesh Jhunjhunwala, the successful stock market investor, is bullish on Indian equity market would be an under-statement. Recently, at a conference he said that the mother of all bull markets was ahead of us. Investors like Rakesh Jhunjhunwala see an opportunity to buy shares low. They see opportunity in adversity. This ability differentiates Mr Jhunjhunwala from us. Retail investors like us stay away from the stock market when we lose money or when share prices turn volatile. We get nervous when share prices of companies that are perceived to be ‘all-weather’, fall sharply. Hence, when we hear people make bull market predictions, it confuses us more than before. “The market is forming a durable base for the next bull market,” said Morgan Stanley, a global bank on the outlook for the Indian equity markets in a note recently. Mr Jhunjhunwala clearly sees an opportunity to buy shares cheap. However, it is important to understand the context here before you decide to press that buy button. . Here are things to know before you rush in: Corporate profits unlikely to fall sharply but rise could be gradual: Share prices follow the growth or fall in company profits. For the September 2012 quarter, analysts believe that a large number of companies have posted a profit growth as expected or above expectation. According to CLSA, an affiliate of French bank Credit Lyonnais, they expect share prices of most of the 58 companies out of 119 they track in India to rise. The brokerage believes that the worst for India’s corporate profits is over. However, nobody is predicted any sharp surge in corporate profits over the next two years. Hence, the recovery to the high growth path could be gradual. Foreign institutional investors have bought Indian shares cheap: In the September 2012 quarter, they have raised their holding in 40 out of 50 NSE Nifty stocks. This indicates that they are bullish on India equities. The flip side to this is that foreign institutional investors have already bought shares at a fairly low value. This has powered the BSE Sensex to rise over 21 per cent in calendar year 2012. It is a top performer among global markets. Foreign brokerages like Morgan Stanley expect the BSE Sensex to touch 23,000 by December 2013. That is a good 13 months away. Market valuation not cheap: The expected price earnings multiple or the PE ratio of the BSE Sensex is an indicator used to determine whether the market is expensive or cheap. The current Sensex value is a multiple of aggregate expected earnings per share of 30 Sensex companies for the year ending March 2013. This is also called the one-year forward P/E. According to CLSA, the Sensex is trading at 15 times expected earnings for 2012-13. Mr Jhunjhunwala argued that the Indian stock has never reached the top of the valuation without this forward P/E ratio of the Sensex going near 24. Hence, in his view, the bull market is yet to begin. However, the sharp run up over the past few months meant that the 12-month forward PE of Sensex is higher now than two months ago and hovering around the 10 year average. Policy Risks ahead: A lot has been said about economic reforms in India. However, the government has kept far too many things to do for the last two years before 2014 general elections. There is a risk in expecting the government to achieve far too much than it could. “Two developments to watch for are the moves to reduce the fiscal deficit via asset sales and increasing infrastructure spending through accelerated project approvals via the proposed National Investment Board,” said Morgan Stanley, a global bank.

The discussion where Rakesh Jhunjhunwala made the prediction on the bull market is here. It is worth listening to other participants as well.  Read more   An interesting article on how you should trust yourself more than others while investing. Read more

44% The Morgan Stanley Capital International or MSCI India index trades at a price earnings multiple higher than MSCI Asia (ex-Japan). This means Indian shares are more expensive than those in the MSCI Asia region. The premium is expected to be 44 per cent over MSCI Asia. According to MSCI, provider of investment decision support tools, the last 10 year average premium is 33 per cent. This means investors are willing to pay more to own Indian companies with similar profits in Asia. It also means Indian shares are more expensive than those in Asia.