ML: Are we witnessing the start of a new bull market?
VS: It’s like asking somebody in 2003 that whether they thought they were in a
multi-year bull market. I don’t think anybody knew at that time and it’s the same this time. The one parallel is that at the lows in 2003, the Sensex was trading almost at 10 times one-year forward earnings. At the lows of March this year or October last year, the market was in a similar kind of trough valuation. So that would suggest that in some ways those lows were significant but whether that is necessarily the start of the new bull market is a million dollar question. I say this in hindsight but not with foresight.
The only thing that I believe is actually comparable is the fact that valuations in March this year or October last year on the forward basis were similar to where the previous bull market started. Now whether you want to interpret that as a new bull market, or the last 18 months was a fall in the bull run that started in 2003, is hard to say. But the important point to keep in mind is that the valuations were at the trough levels that we have seen historically and in a way the price levels were suggesting that all the macro bad news had been discounted. I don’t think you answer that conclusively unless you answer with hindsight.
ML: How different is the current rally from 2004-06 or 2006-08 periods?
VS: The beauty of 2003-2008 period was that you had all cylinders firing. Will we get all those cylinders firing all over again? I have my doubts.
The only piece that is in place now is the local piece. The global piece is not really there. But about 40% of our earnings are not driven by the India story. It’s driven by what is happening at the global level. Reliance’s refining margins are not determined in India, they are determined globally. Steel prices for SAIL or TISCO are determined globally and not locally. The software sector is dependent on the US situation. So 40% of your earnings are affected in one way or the other by global environment and global growth.
Let’s face it, at the end of the day there is nothing in the last six years which tells you that we are anywhere decoupled from the rest of the world. It seemed that we were decoupled from the world during 2003-2008 but as somebody pointed out that even sub-Saharan Africa recorded a stellar growth till 2007. There is no data indicating that we have decoupled very significantly from the world in terms of growth rate or in terms of the way asset prices behave. And given the fact that the global scenario remains gloomy, at some point it even clouds the visibility of going back to 9% GDP growth. Can India go back to a 9% growth rate in the absence of a conducive global environment both in terms of growth and capital flows? That’s pretty much impossible. In that case, the current forces are very different from what fuelled the previous bull run.
In general, global cues remain very important because if the last five years have been correlated, last 18 months have been even more correlated and the last six months have been incredibly correlated in terms of the way prices are moving across all risky asset classes. That poses its own challenge. At the end of the day while you look at the macro factor and feel positive, you are not seeing the kind of lack of correlation that you would like to see in the behaviour of asset prices and that suggests to me that there is some level of risk and therefore global cues can create downside risk as much as they can create upside reward.
I think what the events in the last 18 months have shown me is that India’s secular growth story has been reinforced, given the way growth has come back so strongly. But it is very difficult to extrapolate that economic trend into a conclusion that the market concerns are off to the races again, as they were in the previous stretches of the bull run.
ML: Is there too much of complacency not only about global growth but also about the domestic growth situation?
VS: Let’s look at what goes into the 9% growth. The very first year when we had 9% growth RBI slammed the brakes in July 2006 saying that the growth is too fast; we don’t have enough productive capacity to support this growth level. They started tightening in 2006 and we got two years of 9% growth despite that because the capital flow was strong and because exports were strong. Today we are in an environment where the exports are not strong. Capital flows have picked up but going back to those levels I think is a bit of a stretch. Have we actually solved any of these so called supply constraints that YV Reddy so famously talked about three years ago? I am not sure. I haven’t seen any data indicating that the constraints have changed. Therefore 9% is a nice number to talk about. But is it a practical number? I don’t know. Presuming that the global environment continues to be difficult, the more practical number is 8% in the first year out of the slump and then settle back at 7.5% sort of a growth rate.