CORRECTION…CORRECTION…. IS IT REALLY COMING?:: S A Shah, CA

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CORRECTION…CORRECTION…. IS IT REALLY COMING?

We all have been waiting for a correction in the market ,so that the ‘healthy’ bull phase can go  on for longer. But is a correction really needs? Will it actually come in the near future?


Market has been on a roll for whole of 2017 ,and the party has continued well into 2018. As the first two weeks of January have shown, the party is still on! The question on everyone’s lips these days is, how long will this last? And  every analyst, every expert, has a theory. Every expert worth his salt now explains why this will last …… well, almost forever.

There are statistics to support every premise. Some cite the P/E of Nifty ,saying it is still not in bubble territory. Some say it is the Price to Book Value ratio which is lower than what it was during the previous bull market peak in 2008. Some others say that the country’s Market Cap to GDP Ratio is much lower than it normally is in a market bubble.

And so on. I have been witness to at least 3 major bull markets and distinctly remember how each went bust , inspite of the views of experts to the contrary. But, that is not to say that the present market is also likely to go bust. No. And why?

Primarily because of two peculiar reasons. One, in the last four years, the market has moved up on first, hope ,and then, on increased liquidity. The primary requirement of a bull market-a sound performance of the economy- is not a reason for the price rise, till now that is.

So the hope for the current bull phase is precisely this. A sound economy, on the rapid growth path. And all indicators point to that. The latest Index of Industrial Production ( IIP) figures for November 2017 are the highest in more than a year. And that is not all. The sale of commercial vehicles in December 2017 have been significantly higher than comparable periods. Higher sale of commercial vehicles indicate an increase in economic activity , something which all have been waiting for.

The green shoots-or signals of a turnaround in the economy - which all have been searching for long could be this. And then a new phase of rise in stock prices could now start soon. If we are expecting that, how high can the market go from here? That is a question which defies a clear answer.

Maybe the past can be some indication. The Nifty went up from around 1000 to 6000 -a rise of 6 times- from 2003 to early 2008, a period of less than 5 years. Again, in a short period of less than 2 years, Nifty more than doubled, from 2600 to 6300 . That was in 2009-2010. As can be seen, the Nifty had fallen from 6000+ to 2600, less than half in about year.

The latest rise has been from 5400 in 2013 to almost double at present, in less than 5 years. So ,in percentage terms, the rise in last 5 years-double- is way less than 6 times in a similar period earlier. So the market could go up way further, if one were to go by this logic. But, it does not always work like that , and further rise in the market will be based on the economy’s performance and little else.

We are of the firm opinion  that the economy is on sound footing, and we are in the midst of a solid bull phase. Our advice to all investors is only this. Do not get swayed by talk and rumours. Base all your investment decisions on solid fundamentals. And think long term . We assure you that if you do that, no correction   in the market will matter to your portfolio. Happy investing.