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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Get Ready

Posted by Muthu on November 3, 2013

Today is my birthday and felt like writing to you.

Hope you had a nice Diwali.

The fireworks created by markets last week added to the Diwali celebration.

Every one loves a bull market:-) 

We’ll know when the bear market ended and when bull market began only in hindsight. However I feel scaling up a new high after a gap of nearly 6 years is an indication of things to come in the future. 

On an average bull markets last for 5 years and bear market for 3 years. But average is only an average and can be misleading. For last 6 years we were experiencing only a range bound bear market. So let us hope that the coming bull market is also longer than the average 5 years! 

People make money in bull market. But those who make big money are the people who had the courage to invest in bear market. You all had the courage to continue investments when things looked bleak and I’m confident you would reap excellent rewards in the years to come. 

Last occasion when market reached all time high, the PE was 28. Whereas now the PE is at around 17 and when taken for one year forward (FY15) earnings, it is less than 15. As much as multiple expands, the growth will also start catching up as the economy recovers. 

There are questions as to why markets are rising when the economy is not doing well. Markets always look into future. Markets move ahead of economy both in boom and burst. By the time the good economy numbers are confirmed in a year or 18 months, markets might have already discounted the same in the price. That is why people who wait for things to improve usually miss the first leg of a bull market, which may be next 2 years.

 By reading Warren Buffett, I learnt to use one more indicator other than PE multiple to understand the valuations in the market. You all know what a GDP is. Market capitalization refers to the value of all the stocks listed in the exchange. If the market cap to GDP ratio is 100%, the market is fairly valued. If it is more than 120, then the valuations are on higher side. Any number less than 80% indicate that the valuation is cheap.

Now our market cap to GDP ratio is around 60%. For the same 21000 levels in 2008, this ratio was above 160%. This shows how much market has become cheaper; as the GDP grew but the market did not grow for the last 6 years. Some one has mentioned that today’s 21000 level is equivalent to 13000 levels in those days when accounted for inflation.

What you need to do now?

The idea of saving and investing is to meet your financial goals. So all that needs to be done is to stay the course, as you are always doing.

Bull market doesn’t mean just steep increase. The markets would continue to be volatile. You can be rest assured that there will be ups and downs and even steep correction. But what bull market means is over a period of next 3 to 5 years, it would keep touching many new highs. The overall trajectory would be higher backed by economy and corporate growth.

I feel a time may come during next 5 years, to rework on asset allocation and even become less exposed to equities! That looks far away. Now get ready for the joyful ride though it would be bumpy.

4 Responses to “Get Ready”

  1. Venkateswaran Muthukrishnan said

    Dear Muthu,

    Wish you a very Happy Birthday!! May this year bring you excellent health, abundant wealth and everlasting happiness!!

    Regarding your MCAP to GDP ratio, I have a question. MCAP is value of only the listed companies but GDP is made up of all entities in an economy. So, whats the logic of comparing these two numbers?

    regards Venkat

  2. Milind N said

    Happy Birthday sir.Wishing u a great samvat year.Thank u for all input and teaching parted.We stayed on courses due to that

  3. Vijayan said

    Many More Happy Returns of D Day………Muthu Sir……….

  4. Kishor said

    Belated Happy B’day Muthu ji.
    And A Very Happy,Healthy & Wonderful new year to you & family.

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