ML: Are we witnessing the start of a new bull market?
NS: I can’t categorise this as a bull market but if you ask me if optimism returning to investors as well as companies and regulators and government or fund managers, the answer is yes. And to some extent it is reflected in the valuations. Unfortunately I don’t follow price patterns as much, but we are today probably standing at a place where crossing the previous high can easily be achieved, provided certain actions are taken and some reactions are generated. The world has lots of money and less opportunities. We can provide as much opportunity as the entire world needs. Our savings and investments can generate 5%-6% growth. But that’s not good enough for us or the market to sustain this momentum forever. But if we can augment our savings vis-a-vis the capital flows from foreigners and convert that into meaningful investments, then suddenly that 5-6% starts increasing to 8-9%. The moment you put this kind of growth in any equation, then everything turns bullish. It’s akin to what Japan delivered between 1970s-1990s, when global capital flows along with Japan’s absorption capacity turned it into a developed nation. A smaller pattern was witnessed in Southeast Asian nations when some countries moved further, some moved a little later but overall they moved further up. And the latest example is China. With capital absorption, they have just kept on growing and growing. We today have the same opportunity. The world has lots of money. Virtually the entire world banking system is a safe deposit locker. You put money and don’t get anything back on the interest side. So if we can position ourselves and use this to enhance growth to 8-9%, clearly the market has much higher level to go.
ML: How different is the current rally from 2004-06 or 2006-08 periods?
NS: In May, June 2006 when the markets corrected, the economy was not correcting. While inflation and interest rates were probably moving up, they were just brakes in an accelerating car. They were not speed breakers. We were trying to stabilise the speed of the car on a curve, which we did and eventually the market realised that this is not a speed breaker, it was just a brake in an accelerating car, the car is still moving and the markets recovered pretty well. Surprisingly, the speed of the recovery then was also quite nice. And most importantly the investor confidence, barring a few instances did not really shatter. At 11,000 or 12,000 when the correction occurred, by the time it started reaching 10,000 and 9,000 and eventually just a shade above 8,000, domestic money kept on flowing. So there was huge confidence that this is just a temporary phase and will recover. If we go back to 2003-04, it was an end of a prolonged bear phase. From 2000 to 2003, it was a horrible nightmare, people lost tons of money and lot of people made a lot of mistakes, at the issuer level, investor level, probably regulatory level. Somewhere in May2004 when the correction came after the recovery from 2003 lows, it was purely on the event of election results surprising the market. While May 2009 surprised positively, May 2004 was a negative surprise. But a lot of weightage was being given to the announcements which were being made in the media and there was a fear about how the economy would shape up. But the reality was that the economy didn’t lose its momentum with change in government; in fact, growth picked up. The foreign capital flows continued, so did the momentum and growth of economy. In fact we sustained it all the way up to 2008. So May 2004 as well as May 2006 were, in hindsight, an opportunity to invest. It provided an overextended market a temporary break, but it was a break on a curve and the overall momentum continued. I think what we witnessed in 2008 was substantially different. It was driven by the exodus of capital from foreigners who were withdrawing not because we were doing badly but because they had certain other considerations. The collapse of global financial giants pushed us into an unknown territory. We hadn’t experienced this earlier and the economy did suffer. We were always highlighting that India is a different country, not depending on exports and the reality was that in the whole of 2008 we were falling more than the other counterparts and the decoupling story was flying in our face. We couldn’t understand why that was happening. But courtesy the efforts taken by the RBI and govt, slowly and steadily we recovered. Today when we see our markets trading at the second-half level of 2007, we are just one year behind. Most of the developed markets are 10 years behind. The decoupling theory which didn’t work in 2008 has actually worked in 2009. We are late by a few months but we are not wrong completely.
ML: Is the current market overvalued or fairly valued given that the market may be discounting the growth of 2010 and beyond?
NS: The market has probably run up too fast, because a lot of investors wanted to participate and couldn’t do so. Has it run fast vis-a-vis the valuations and fundamentals? The answer is no. We were trading at a cheap and attractive zone at just 10 times one year forward earnings in March. Even though interest rates were coming down it didn’t really benefit the stock market in terms of change in valuation. But once the confidence started returning from March, April, May onwards, the markets have come back to fair value levels. Probably it is a little bit at the higher end of the fair value, but again that’s a reflection of optimism. People are bit more bullish about the future and it is reflected in the markets.