Market watch: Befriend the bull
Too many buckets of money are entering the game, with different perspectives and objectives. In such a scenario, the endgame gets priced in far sooner than one expects, writes Udayan mukherjee.
I like the term. It describes our bull run well. Keeps going, relentlessly, like a red bull. A lot of people are very worried today, about what will happen with liquidity in the next few months. While those worries are legitimate, I do not think it will stifle this bull market beyond a point, if that.
Just a quick word on hedge funds, since that is where the worries lie. For the moment, they may be saying that they will not submit to regulation and may even pass up the India opportunity. My sense is that most of them will eventually have to participate. India will be, if it is not already, one of the three hottest stock markets in the world. Which fund can afford to stay out of such a market, over time? Every other consideration is secondary; the primary goal of every fund is returns and out-performance. Some will take longer than others, but they will have to come. Also with the kind of pressure that is building up internationally for hedge fund disclosures, I will not be surprised if in the next 18 months — the sunset period for these funds — many of these funds actually do end up getting regulated in their own jurisdictions. If that happens, great, the problem is solved. All this may seem too optimistic now, since the news is only three days old. Over time, I will be surprised if things do not pan out this way.
When the Sensex hit 19,000 a few days back, everybody got very alarmed at the pace at which it had gone up. Barely seven days have passed and we are back there again and who is to say 20,000 will not follow soon? So what do we do now, jump up and down again about the “speed” of the rally? Truth is, markets have changed, globally. The days of “gradual/measured/moderated” movements are gone.
Too many buckets of money are entering the game, with different perspectives and objectives. In such a scenario, the endgame gets priced in far sooner than one expects. When the market has to correct, there is a sharp sell-off, never a gradual drift down, and the bear phase gets compressed to a few days or weeks. As we just saw a few days back. When the market has to get re-rated to a much higher price-earnings multiple, that, too, happens much sooner than one expects. If you find it too expensive and too fast, too bad, someone else gets the ride. This is not to say excesses are not happening. In any bull market 20 per cent of stocks will be trading at ridiculous valuations, but that should not deter you from participating. We remain in the mother of all uptrends.
For me, the best way to milk this is not to trade futures, profit when it goes up and then get hurt badly when a bout of volatility hits you. It is by buying good stocks and then holding on for dear life. Every time there is a big fall, buy more and then hold again. Periodically, review the stocks you own, as prices move up too fast nowadays. That is only to spot relative returns. It sometimes makes sense to switch out of certain stocks to others. Start with a healthy exposure to stocks and then keep upping it whenever there is an accident. We get a couple of big falls every year: that is the time to up allocation to stocks.
I certainly do not know when we will be hit by the next 20 per cent fall, but feel convinced that we are eventually going some place even the most bullish analysts cannot predict today. Make the red bull your friend, keep running.
(The writer is Executive Editor, CNBC-TV 18)