India bull market: Is this bull market similar to the bull market of 2…


I just pray and wish that people learn from past experiences and invest in quality stocks rather than cheaper stocks, says MD, Kotak AMC.

You are seeing this retail frenzy playing out on a daily basis in the markets. The fear of missing out or FOMO feeling is keeping stocks abuzz as well. Do you think that is going to be really enough? More importantly, at a larger level indicates a good sign. I mean you can pick out reasons where the people are at home. They have got that spare change to trade or dabble into stocks but they are encouraging signs nonetheless.

Participation of retail investors is always a good sign. However, our experience of the past suggests when you are buying into Z group shares and you believe single digit share is cheaper than double digit share and double digit share is cheaper than triple digit share, generally that experience does not turn out to be good. Buying low quality stocks because they are available at 20 paise and Rs 2 or Rs 20 has never worked in the equity market over a longer period of time. I just pray and wish that people learn from past experiences and invest in quality stocks rather than cheaper stocks.

Why were institutional equity flows low in the month of June? People should be gratified and satisfied with the market recovery given the market conditions and the economic conditions and the medical conditions. Yet when markets came back with force and vengeance, the flows in the month of June were not extraordinary.
Undoubtedly, the month of June closed significantly on the pure equity side and hybrid side. Only index funds continued to recede flows because of EPFO. There are a couple of reasons why these flows have reduced. One, there is genuine financial emergency for a certain set of people and they are redeeming from their investments to put into their business or household. Second, there are a lot of restrictions on physical movement, especially in the month of May and first half of June. Mutual fund distributors who go and handhold customers were not able to do it as much as they were able to do it earlier. Yes, they are able to get in touch with people on the digital side but when you go and meet personally vis-à-vis when you do it digitally, there is a lack of physical touch and warmth.

Now this has also resulted in some people taking decisions on their own and they are booking profits as their returns have recovered. SIP returns which were negative in the month of March for three years have now become positive but people are redeeming because they are seeing that markets have moved up and our returns have become positive. They are not able to reach out to their distributors and their advisors are not able to reach out to them on a physical basis and that is also probably resulting into a scenario where without appropriate advice, they are taking a call on profit booking.

You would remember the 1999-2000 bull market. Is this market behaving like 1999-2000 where valuations were disregarded and markets kept on going higher and higher and that party on the upside or the trend on the upside continued for a very long period of time? Are we going through that patch of the market where irrespective of what we talk about in terms of valuations or flows or fundamentals or earnings, the market will disregard it?
Again, if I look purely from top-down, if I am not mistaken marketcap to GDP ratio in 2000 would have been upwards of 100%. In 2008, it was 149%. Currently we are talking about a marketcap to GDP ratio of 71%. So there may be pockets of bull markets in certain stocks but certainly it is not there in the overall market. Second, there is some similarity in what I will call low quality stocks. Iin 2000 we saw that if a finance company changed its name to a technology company, the stock would move up. In Z group shares, we are seeing some of the companies running up significantly when change in management occurs or just because it is low price. So there is some similarity of a bull run in Z group shares or low quality shares like 2000 and I just hope and pray that people learn from 2000 experience and not make the investment in low quality stocks.

Third, if we bifurcate on a bottom-up basis in Nifty and we calculate this on June 30 when Nifty was about 10,300, the top 15 stocks of Nifty represents a level of about 13,890 and bottom 35 stocks represent Nifty levels of about 7,500. Clearly, there is a sharp polarisation in some of the expensive stocks vis-à-vis some of the cheaper stocks and that was not the case in 2000 or 2008.

In 2000, every Tom, Dick and Harry in telecom, media and technology was hitting all-time high levels. This time only few banks, few FMCG companies, few pharma companies are hitting all-time high levels. So there is not much similarity at the top end between 2020 and 2008 and 2000 but there is a lot of similarity in low quality stocks between 2000, 2008 and 2020.

Do you also see a rotation in sectoral preferences because so far the markets have been pretty focussed; whether it be on financials or pharma. Do you see that changing towards consumer names or cyclicals?
Undoubtedly, some sectors will do well and some may not. However, in my opinion, the theme which is working across the sector is as under, One, leaders in any sector whether they are large, mid or smallcap are getting differentiated from the follower. So if you are in the top three or top five companies in a sector, you are getting one kind of valuation and one kind of investor interest whereas if you are a follower, then there is very limited interest.

Leveraged companies are getting shunned by investors as well as lenders across the curve and across the sector. People are preferring to invest into a stronger balance sheet rather than a leveraged balance sheet between these two themes of leverage versus leadership. Clearly the market across the sector is differentiating companies which can raise capital and where governance track record is fine vis-à-vis companies which would not be able to raise capital. So I will say yes, sectors will move and some sectors will do well, but leverage and leadership are two criteria which are going to differentiate across the sectors.

For those that have been feeling that they have missed out and they do not really want to completely miss a chance being part of this rally, what would you advise? Are there still ample entry points and would you advise waiting for a further correction?

If you are a trader, undoubtedly you need to be super agile but if you are an investor, then you need to be lazy. You should not be swayed by market movement in just a short period of time. I will request investors to define their investment objective and create a financial plan, consult a good financial advisor for developing that financial plan and follow that financial plan without worrying about the market.

I will give you a small example. In the month of Jan 2020, most of our funds SIP returns were in double digits. A 10-year SIP return on our emerging equity fund was upwards of 17%. In March when the markets corrected, it became 9% and in the month of June, it has bounced back to about 12% plus. Now this kind of variation will happen even in your SIP returns because that is the nature of the market. You cannot be adding volatility to your portfolios by swinging with the market movement. If you have investment objectives which are well-defined and have a plan which is well-defined, then just keep on executing that plan without worrying about market movements. The market nature is to go up and down and you should not be going up and down in your sentiment looking at the market performance.

Do you think the way forward for equity investors will be volatile or do you think the economy and the markets will continue to surprise us? If we would have spoken about where the market levels would be and what the sound bites we will get from big companies, I do not think anybody anticipated that Nifty would be closer to 11,000 and we will see a marked recovery in auto, consumer durable and other key sectors?
I think the recovery of the economy is happening on a steady basis. Bharat or rural India seems to have normalised. Fertiliser sales in May were 100% higher than last May. Cement sales and two-wheeler sales are normalising faster in May as well as in June in rural India. Tractor sales for certain companies were at all-time high in rural India in the month of June. The rabi season output was higher than the advanced estimate and the monsoon has been 20% above normal. MNREGA allocation and direct benefit transfer to rural Indian economy will allow it to normalise much faster. So Bharat or rural India will give positive GDP growth in FY21.

Urban India also seems to be catching up fast and the GST collection in June at Rs 91,000 crore was almost three times more than Rs 32,000 crore in the month of April. That kind of shows that the overall economy is normalising at a faster basis. Now if this is the commentary that is going to come from corporate India, undoubtedly markets will take it positively. More importantly, on a global basis where despite pumping trillions of dollars they are not able to see rebound in economic activity compared to that of an emerging market, which is able to see rebound in economic activity, will also attract capital flows. The world will be full of liquidity and low interest rates will search for growth and India could be in a sweet spot subject to this medical solution. So I will say I am looking at markets on an optimistic basis but again I will caution retail investors: do not assume that lower price stock is the place to invest into. Learn from the experience of 2000 as well as 2008 and buy quality stocks rather than cheaper stocks.



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