It's a bull market, but not like 2003-08; Sensex could hit 60000 by 2017-18

Is India in the midst of a multi-year bull run just like 2003-08?

Our best-known Big Bull Rakesh Jhunjhunwala seemed to think so months ago. As early as March 2014, well before anyone knew about the scale of the Modi wave, he said this was going to be “the mother of all bull markets.” He talked of not just a multi-year, but “multi-decade” bull market. Others fund managers have also said so - in similar, if not same, words. Jim Walker, Managing Director, Asianomics told CNBC TV-18 recently, that this bull run is not going to peter out before 2017-18. “I think you might be talking about 2017-18 before this bull run is finished.”

The Economic Times yesterday (8 September) quoted Nilesh Shah, Managing Director and CEO of Axis Capital, as saying: “India is on a multi-year bull run supported by fundamentals as well as flows….This is a period like 2003-08 where, despite corrections, the market is multiplying manifold.”

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One of the big stock market truths is that when everybody is bullish, one should be cautious. However, I do not basically disagree with the market mavens that we are into a multi-year bull market. I would only dispute the scale of the climb. I don’t believe 2013-18 is going to be a rerun of 2003-08.

No two bull runs are exactly the same. While all bull runs have broad patterns that appear similar on a graph when seen from a distance, the actual duration and longevity of each bull run varies. This is because the environment in which bull runs happen is constantly changing - more so in the interconnected world of financial markets where positive (or negative) sentiments are transmitted quickly into trades and prices.

So let’s be clear: even if we have a multi-year bull run, it is not going to be a repeat of 2003-08. In our own market, the Sensex rose seven-fold in those five years. If the same were to happen again, and assuming a starting point for the current bull run at the August 2013 low of around 18,000, the Sensex should be 1,25,000 by 2018 - a most unlikely prospect.

The case against a 2003-08 kind of mega bull market is simple.

First, the world is not the same. In 2003, barring Japan, every major economy was booming, driven by high liquidity and high growth rates. Boosted by George w Bush’s tax cuts and post-9/11 heavy spending on security and defence, the world was awash with cash and liquidity. The Indian markets - then a very small one - rode that wave of hyper-liquidity for what it was worth. Starting from a small base or under 3,000 in 2003, the Sensex rose seven-fold to cross 21,000 in January 2008.

Second, there was the little-pond-big-fish effect in India. When the world is awash with money, the little ponds - like India - rise more than proportionately when the big fish dive in. A little bit of FII money did more to boost the Sensex than it does now when the market and economic base is bigger. Between 2003 and 2008, for example, the Dow just about doubled from over 7,000 to 14,000. We know what happened to the Sensex in contrast.

Third, there was the double-coincidence of high liquidity and high growth. The Indian economy returned to growth mode in 2003-04 after years of slowdown following the Asian financial crisis (1998), the post-Pokharan sanctions (1998-2001), the dotcom bust (2001 onwards) and the post-9/11 downturn. The liquidity surge happened just when our own economy was about to take off vertically. Combustible economy met the torch of global liquidity and - BOOM. It was an improbable and unstoppable combination - which is why even a government backed by the Left got so much growth and tax revenues.

Fourth, in the post-Lehman world, liquidity again hit the roof. The US Fed, the European Central Bank and the Chinese authorities opened the monetary tap to prevent a depression and a credit gum-up. This liquidity surge - driven by risk-aversion - went largely to the developed markets, with the Dow rising from a bottom below 7,000 in early 2009 to over 17,000 now. In short, the Dow soared more when the world was down than when the world was growing fast. The Sensex, in contrast, rose from a post-Lehman low of around 8,500 by about three times.

Today, world conditions are different. The US is trying to move out of excessive financial accommodation, and China is trying to avoid a debt bubble. Europe is still under the weather, and Japan is far from recovered. India itself is just about rising from the bottom, but it faces huge headwinds domestically in terms of a high bad loan situation, and legal and economic pressure to make everything costlier due to the need to cut subsidies and sell all scarce resources by auction (spectrum, coal, oil). The cost pressures for the economy are clearly upwards.

If, in 2003-04, India was capable of 8-9 percent growth, thanks to favourable global conditions, including high liquidity, today neither domestic conditions nor global ones are that favourable. Today, we will be happy with 6-8 percent growth - which is what seems achievable in 2014-19.

But there is still a case for a multi-year bull run. This comes from the new government, which is business-friendly, the possibility of a gradual improvement in corporate earnings, the likelihood of interest rates coming down early next year, and continuing high financial inflows. Moreover, after five years of a flat Sensex, there has been suppressed demand for equity.

So, yes, I do believe that we are going to have a multi-year bull run, but not of the kind we saw in 2003-08 because the global environment is tougher now than it was in 2003.

I would predict a doubling or tripling in the Sensex by 2017-18 (from 2013 levels), and not a five-fold or six-fold jump to over 1,00,000. This means a Sensex value of around Rs 50,000-60,000.