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The stock market bull run that started in 2014 looks to be a secular in nature. Secular trend—often called a generational market—usually lasts for 10-12 years. Cyclical markets usually have a life span of two-three years
Nifty, the benchmark of Indian stock market, surged past the 10,000 mark. The moonshot rally of the Indian equity market is powered by abundant liquidity, political stability and robust macroeconomic parameters. Ban on derivative positions against participatory notes, technically a short-selling ban against P-note, also known as offshore derivative instruments, also act as a fuel to power the rally. Overseas funds that were short on equity futures scrambled to cover their exposure to comply with SEBI's directive. Sensex, the other popular benchmark, hit a new record at 32,500.
The great Indian stock market bull run looks secular in nature and this equity juggernaut has enough fuel and momentum to advance. Mad rush from smart money, inflows from mutual funds, domestic institutions,overseas funds and portfolio investors are key drivers. Liquidity is abundant and thanks to lower floating stock, too much money is chasing too few blue chip stocks.
FFF: Flow, fancy and fundamentals
From a market practitioner's perspective, presence of three Fs, flow (capital, goods, news), fancy (hope, euphoria, perception) and fundamentals (macroeconomic factors like inflation, GDP and consumer spending) often dictates direction of any asset markets. Capital flow is pouring in, as banks are well-capitalised after demonetisation. Overseas inflows are also seen as robust. Small investors, who entered into the market using systematic investment or mutual fund investments, reaped handsome rewards. High net worth investors and professional investors, funds, FIIS and DIIS, also made spectacular return on their investments. Such a feel good scenario has created positive feedback loop—a virtual cycle.
Where do we go now?
The stock market bull run that started in 2014 looks to be a secular in nature. Secular trend—often called a generational market—usually lasts for 10-12 years. Cyclical markets usually have a life span of two-three years. Present state of market indicates a quality rally. Meaningful corrections may come and go. However, a large scale collapse is less likely. In the current scenario, small investors who missed an earlier bus of opportunity may explore index investing, especially exchange traded ETF. Large cap stocks and several mutual funds look pricey and new investments may not produce a hefty return in one-to-three year horizon. Indexes are usually designed to be upwardly mobile in the long run. Small investors or conservative investor may prefer index ETF investment plan and hold for 10 years or more. Index ETF, investing in SIP form, looks reasonably safe in the current context. However it is meant for small and conservative investors. High net worth or proactive and aggressive investors have many other options.
Alice in the bubble-land
Indian economy is a somewhat closed economy and remains fairly insulated from smaller external economic shocks. Indian economy remained fairly resilient during USA subprime crisis and European sovereign crisis. It also weathered the Chinese slowdown and such external influences. However, India cannot remain insulated forever. Commoditisation of money, digitalisation of markets, growing cross-border trades, innovations in derivative trading and HFT-Algo trading has given rise to some unknown systemic risks. Since last several years, there has not been any major credit event or large-scale bond or corporate default.
Global asset markets, notably technology stocks, are in a super-bull status and may be entering into a bubble stage. Some of technology benchmarks like NASDAQ or Topix Japan look pricey. Emergence of disruptive technology like machine learning, block chains, industrial internet of things, augmented reality and its impact is difficult to predict. Developed markets such as USA, UK, and Nordic markets are in a wobbly state.
India's macroeconomic and political stability makes it a sweet deal. However, geopolitical risks like border issue at Sino-China, south sea and Korean peninsula is also tense. Three major events line up in the second half of 2017. German elections, USA debt ceiling talks in August, and Chinese People's Congress meet to discuss transfer of power are potential wild cards. Ongoing investigation against US President Donald Trump is also a wild card. Global risk appetite is at a high. The fund managers' hubris galore—collective self denial for some of the core economic and political issues—and new era of disruptive technologies are reshaping world order. Path of least resistance is up for the market; however tail-end risk is slowing shifting downside. Stay invested, stay vigilant.
Biren Vakil, CEO of Paradigm Commodity Advisors Pvt Ltd, runs a research boutique which provides risk management and strategic consulting in major markets. He regularly appears as a guest on business channels like CNBC Awaz, Zee Business etc
