Raamdeo Agrawal of
Motilal Oswal feels that it could take two years for the market to come back to normal. He said investors must exercise control and not go into panic mode.
Agrawal added that it is difficult to say at what levels prices will stabilise. Typically, two years after the bull runs are worse, he said. He feels one and a half year of further pain is still left. He said that the bear market is expected to last for 12–18 months.
Agrawal said that there has been massive increase in corporate profits in the current bull run compared to the phase in the 2000s.
Here is a verbatim transcript of the exclusive interview with Raamdeo Agrawal. Also watch the accompanying video.
Q: What is your take on what is going on in the market today?
A: I have never seen anything like this. I have seen three cycles––1985, 1987 and then 2000, and now this. Every time the feeling is different, the story is different, complexity is different. This time is absolutely stunning. No parallels can be drawn in terms of valuations. One can get companies at one-third of the book overnight.
So, these are unusual times. I cannot even structurally think how to think about it except that one needs to control their behaviour at this point, and let the storm pass.
Q: Where will it stop? We went out from 3,000 to 21,000, and we have already gone back to sub-9,000. How much will the clock be turning back? Do you think by the time this is done?
A: If one looks back at the last 12–15 years, one of the things that comes out is that these are boom and bust kind of markets. Every seven years we have a cycle–1985, ’92, 2000, and 2007. If one does the market capitalisation to GDP calculation, on the last two occasions, the market went to about 55–60% kind of market to GDP at the top and the bottom was formed at about 25% to GDP.
This time, thanks to global participation, low cost of money and F&O, the market expanded to 180% of GDP. The expansion went from Rs 8 lakh crore to 75 lakh crore in five years. So, that is the size of the party we had.
Even till yesterday the valuations were at about Rs 31 lakh crore. Today, it must be more like Rs 27–28 lakh crore, which is still about 60% to GDP. So, we are still in that kind of broad valuations, which is more than 50% below the peak we saw. I would not like to predict where it will really stabilise, but I am just giving you a perspective.
Q: How long would it take after this kind of damage? We had damage in the last bear market as well but this time it seems the damage is far more widespread. How long would it take for the market to finally get back on its feet?
A: Typically, in the first year post the bull run, we saw the peak around January 15, is a non-negotiable kind of thing. Looking at the spread and diversity and intensity of the whole problem, it could be two years and post the dotcom bust it took three years.
Literally, from 2000 to 2003 we lived in a bear market, which was unprecedented. So, the pain was very deep and prolonged. However, two years is a good period to think about at this juncture. We are not even a year right now into this. So, at least one to one and a half years of painful journey is ahead of us.
Q: From the past bear markets that you have seen in 1992–2000 and some of the past bear markets that you have read about, do you sense that this one is pretty much in line with those severe bear markets or does it give you any reason or sense that this may be actually a little more abnormal. Do you feel that there may be further weakness and that it won’t pan out the way most bear markets have panned out in about 7–8 year cycle?
A: One of the differences this time is that earlier bull market followed by the bear market were not associated with very strong earnings in the corporate as is in India. This time if one looks at the P/E side it never went into crazy levels, it remained at 18–19–20 times. So, the whole thing was filled up. Corporate profits in 2002–2003 were more like Rs 40,000 crore. This year in 2007–08 full numbers we have is about Rs 3 lakh crore. So, there is a massive expansion of corporate profits in 2002–2003 and 2007, so that is the difference at this point of time.
I think P/E wise, corrections are more or less are at a very comfortable level. The biggest challenge is how the profits shape up for the corporates going forward from here, that is a different thing. I think the pace of decline is absolutely breath taking, you are coming down 50% but 50% in five days and 50% in 150 days, I think there is a difference.
Q: Has the correlation of equity markets across the globe increased in comparison to the bear markets you have seen in the past and perhaps that is why there is so much mayhem and confusion?
A: It looks like businesses have become much more integrated globally and capital has clearly flown from one part of the world to another. What is happening in the US is not my business kind of a situation here. So, if Lehman or some global major falls, I think there is a kind of related thing here or if the emerging market equity volatility index goes up there and the papers have downgraded, I think there is clearly an impact here in terms of cost of equity or debt out here in the local markets.
So, I think the whole world has become much more integrated and globalised and hence one has to take all the flak. We might emerge much stronger at the end of it as a country. However, I think the way, the psychological damage of fear cannot be escaped.
Q: There is this old adage that when blood is running on the street or fear is at its highest levels. Would this be a great time to buy? In the long-term, would you make some bit of money?
A: The problem right now is what earnings we have for the last four quarters––that is the real thing. But, what we are going to see in next quarter and the quarter after that is going to be very different most likely. So, earnings to bond yield right now is holding at 1.35–1 in the regulation I did 3–4 days back.
The worst in 2002–03 was about 1.7–1.8, so we are very rapidly reaching there and after reaching there it takes another 1–1.5 years to bottom out. So, one is reaching the under valuations and then staying there, so that all the people who are hurt psychologically have to get out and make a way for completely new corporate culture, new earnings culture, new interest rate, new commodity cycle. There will be lot of things changing this time. The story is different this time but it goes on in equity market.
Madhusudhan Kela, Head-Equity Investments, Reliance Mutual Fund feels this sell-off looks like a final capitulation. However, he said this could not be termed as a bottom for the market yet. He does not see any redemption pressure in mutual fund and said that they are sitting on around Rs 5000 crores.
Kela advises investors with a 3-4 year perspective to buy into this market as some companies are now available at one third of their cash balance on their books.
Sudarshan Sukhani of Technical Trends believes the markets have seen the worst of all damages today and does not expect it to go lower today. He expects a bounce bank and said there would be a tradable rally in the Nifty. However, he is unsure about when that would happen.
Sukhani does not recommend short selling in the market and advices investor to either stay away or muster up the courage to go long.
Technical Technical Analyst Ashwani Gujral said, “We have strong support between 2,600–2,650 levels. So, probably the market will stop out there but one will not get as meaningful a bounce as is there on most support levels. However, finally, the market will go through 2,600 and may sort of test those 2,000–2,200 levels on the Nifty which was a significant break out level. That was a previous market high.”
Gujral further said that the way Kospi, Nikkei and all other Indices are falling around us these local support levels don’t count for much. He feels that in bear markets, support levels don’t hold. He added, “We have seen how from panic levels, one have panics every week. So, it is time to wait and let this pass.”
