Is this a new bull market or should we sell everything and stay liquid?

I have been harassed by market timing clients lately. All of them want to invest in equities but they want to do it at the market bottom when the economy starts to revive. One of the clients was incredulous (20 to 25 days back) when I said that I was fully invested. He said “Come on don’t be ridiculous, everyone knows that the economy will be in a bad shape for some time to come and markets will come down”. Now he is in a dilemma. Markets have run up 25% and he has been selling all this while. His question now is should he sell more or should he buy so as to not miss out. I wish I had an answer.

Warren Buffett wrote the following in his 2008 letter to Berkshire shareholders.

“Neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.”

That got me to look at some past recessions (as usual, the US data is more readily available than Indian data). Here is a link to an excellent post on how long recessions have lasted and how markets have done in those recessions.

In 8 out of the 14 recessions in the US a new bull market started well before the recession ended. 

Let us look at India and a financial crisis that India was facing in 1991. India had to sell 20 tonnes of gold in May 1991 and to pledge another 47 tonnes in July 1991 to raise foreign exchange to meet its import needs. (Please bear in mind that Dr. Manmohan Singh had not yet achieved the rock star status. There were questions regarding the survival of the government and of the country itself). So what did the stock markets do during this time? Crash? Hardly. The BSE Sensex rose from just under 1,000 on January 1, 1991 (999.26 to be precise) to 1275.23 on July 1, 1991, a gain of 27.5% !!!

This is not to say that we are definitely in a bull market or that share prices can only go up. If I could predict the weekly and monthly market movements, why would I work at all? I would be owning an island somewhere and chilling out, just buying when an upmove was about to begin and selling out when the downward trend was about to start.

As individual investors and as investment managers all that we can do is to select good businesses at attractive valuations to invest in and then let the businesses prosper over the long run. In the interim if Mr. Market overvalues those businesses significantly, we use the opportunity to sell. There is no exercise as futile as trying to predict the markets, economy or election outcomes.

(PS – BSE Sensex was at 1957.33 on January 1, 1992, an increase of more than 95% over the level of January 1, 1991. So much for predictability)

Are we out of the woods yet?

The question everyone has is “Is this the bottom?” Trying to catch tops and bottoms in the market is a futile exercise. Nevertheless since the question is asked so often, I will try and add my two bits worth to the subject matter.

Let us look at individual sectors and companies to see if this is the worst that can happen. Any spending which is discretionary in nature (even an option to postpone will help) will suffer. This is a time when interest rates are high, EMIs and loan tenures have shot through the roof, fuel prices are pinching, the job market is uncertain and demand is faltering. In such a scenario, neither are families nor are corporates going to spend significant sums in buying cars / two wheelers / trucks / buses or go on a holiday or dine out or go to the movies or put up a new factory …….. you get the idea. People are just trying to hang in there and not do anything ambitious. So here are sectors where I feel worse times are ahead in terms of earnings. Whether the stock prices have factored in this is a moot question.

Sectors to avoid

Auto (Cars, CVs & two wheelers)

Airlines and Hotels



Capital goods

Real Estate / Infrastructure companies

Utilities (surprising? there will not be a demand reduction, there could be a P/E reduction in a high interest rate scenario)

Stock brokers / Investment banks

Commodities (oil, copper, zinc, aluminum, steel…a bubble about to be burst, but that is a subject matter for another post)

Any bull case scenarios for these sectors? All the blah blah written above still does not answer the question whether this is the bottom but if large segments of the industry are going to see pain, I personally do not think we are out of the woods yet.