Where not to look for the next stock market rally

Every stock market rally has a sector that leads it. In the late 1990s, it was the technology sector. Valuations of technology stocks zoomed. Infosys was quoted at well over 50 times earnings at the peak of the tech rally.

Post the tech bust in the early 2000s, the market rally was led by resources. Commodity stocks became multi-baggers while stocks in real estate and infrastructure followed closely. The 2008 market bust was due to a fall in valuations in the commodity, real estate and infrastructure sectors.

[caption id=“attachment_17137” align=“alignleft” width=“380” caption=“The success of IPOs like that of LinkedIn points to an upcoming trend that internet technology-driven sectors are more likely to lead the market. Mike Segar/Reuters”]  [/caption]

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The markets now are in the fourth year of a bear phase, if one goes by current levels from peaks seen in 2007 and 2008. The Sensex and the Nifty have shown negative returns from early 2008 to date.

Growth leaders such as China have seen stock indices fall 50 percent from highs and have not recovered. The Shanghai composite index is still down by around 50 percent from the highs seen in late 2007.

What is the future of the market and what will lead a rally in the next few years?

The future is definitely bright if one looks at it from a broader perspective. Leaving out the losses sustained from bubble busts in sectors like commodities, infrastructure and real estate, there are sectors such as mobile and internet technology that are drawing in investor interest. The success of the LinkedIn IPO, where the share price doubled from the IPO price, is a sign of things to come. The biggest success stories in the recent past are in the internet technology space.

Facebook (not listed) is the biggest of them all, touching valuations of $50 billion in a few years’ time. Other success stories are all to do with technology, with Apple leading the way. The Apple stock has been a multi-bagger in the last five years with stock prices going up five times.

There are skeptics who call the boom in stocks such as Facebook and LinkedIn a bubble, but these same skeptics did not in their wildest imagination visualise a changing world order. Internet technology has changed the way business is done and it is here to stay, whether one likes it or not.

The market has to start looking for new leaders. The old leaders are gone. Oil prices, for example, have gone up six times from $20 a barrel to $120 a barrel (Brent crude). To imagine Brent crude going up by even three times to $360 is asking for too much.

At current prices there is a huge inflationary impact and at higher prices economies will collapse, leading to sharp depressions across the world. There may be a better future in stocks related to alternate energy sources.

Similar will be the case with other resource stocks and stocks dependent on old world economy mainstays such as infrastructure. Countries like India will need infrastructure and good infrastructure companies will continue to grow but never at the pace internet technology companies can grow.

Growth going forward will be driven by sectors that do not depend on policymakers’ largesse. It will be driven by user preferences. Consumers are already showing a penchant for technology that saves time, costs less and is trendy.

I am not pinpointing internet technology or other types of technology as leaders of the future. However, the buzz happening in these sectors and the success stories of social media networking and mobile technology companies is not to be ignored when looking at the future.

Listen to what your children are talking about and using; and then you will be able to identify the right stocks.