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

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Current Bull Market

Posted by Muthu on May 17, 2014

Close to last one year, we’ve been more bullish on a bull market:-)

I also mentioned last month that we’re already in the early stages of a bull market.

What I said was based on my understanding of cyclicality, price in relation to earnings, peaking of interest rate cycle, economy hitting the lowest point in growth cycle etc. I never anticipated or accounted for a strong central government under one party (BJP) run by an able administrator (Narendra Modi).

This development is going to be very positive for the economic growth of the country and hence for the stock markets as well.

To be fair to the outgoing government, since September 2012, when Chidambaram became the finance minister again, there were many corrective actions taken which has started showing effect (like lower CAD-Current Account Deficit).

In my opinion, a non-corrupt and efficient administrator can do wonders for Indian economy which already has many structural advantages (like favourable demographics) waiting to be tapped. No government can be free of corruption and policy blunders. Modi sarkar may be no exception. But my hope is that Modi government would be less corrupt, more pro-growth and pro-development with strong execution capabilities. Majority in parliament gives enough bandwidth to focus on execution than spending time on managing the tantrums of allies (like mercurial Mamta or Jaya or Mayawati).

Being skeptical and cynical are not one and the same. Skepticism is a blessing and cynicism is a curse. Skepticism calls for optimism or pessimism depending upon the situation. Now the time is to be optimistic. It’s actually a no brainer. Things are already turning favourable (like peaking of interest rate cycle, growth cycle picking up etc.) and the new government is only going to accelerate positive things. Critics may argue that Modi has no magic wand. There is no requirement of any magic wand. Being strong in administration and execution would suffice.

Though there would be improvement in sentiment and attraction of foreign capital immediately, it would take 15 to 18 months for the earnings to pick up. As we never get tired of saying, prices are slave to earnings.

The earnings of Sensex this year is expected to be 1525 (Source: Motilal Oswal). Between 2001 to 2008, when the economy prospered, the corporate earnings grew at 21% CAGR. Assuming we grow at similar levels for next 5 years, at 20% CAGR, the earnings of Sensex may be 3795 in 2019-20. PE multiple would expand as the earnings grow. Assuming the PE multiple is at par with growth rate (20 PE for 20% CAGR), we are looking at Sensex levels of 75,000+ in next 5 years. 3 fold returns in next 5 years. This is only an illustration. It can be lower or higher. What I’m trying to convey is that the direction is clear for next 5 years. Risk- Reward ratio is now very favourable and I feel that we can expect an annualized return of 20% to 25% for next 5 years from good equity funds.

As I always repeat, even in bull markets, you’ve falls, sharp corrections, strong ups and downs. This bull market would be no exception. But after every fall, we would continue to make new highs. The growth would not be linear and would be in spurts. So do not hop in and out of market. Stay the course. The best ways to participate in equities is through SIPs and use this opportunity to increase your allocation to SIPs.

It’s a good beginning. As the saying goes, well begun is half done.

One Response to “Current Bull Market”

  1. Nishanth said

    Stay the course and have patience.So simple,so true,so difficult to practice and achieve

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