1. Human mind thinks analytically and while it’s highly effective in understanding businesses, it’s ineffective in understanding markets
2. Scientists at the Santa Fe Institute are now studying complex adaptive systems – those systems with many interacting parts that are continually changing their behavior in response to changes in the environment. The latest topic added to complex system is stock market 😀
3. The critical variable that makes a system both complex and adaptive is the idea that agents (neurons, ants, or investors) in the system accumulate experience by interacting with other agents and then change themselves to adapt to a changing environment.
4. The market and the economy are best understood from a biological perspective: especially Darwin’s evolution theory.
If you use static laws of physics or mathematical formulae, you would almost always go wrong as markets are way smarter than that and would have moved to secondary (or higher multiple) order effects.
That’s the reason when a particular strategy attracts enough herd, it stops working.
During the COVID market bounce when the indices had retraced 2/3rd of the fall, there were many experts across the globe providing historical statistics of how markets always turn back from here.
It was so widely believed that probably many positioned for it well in advance and the markets just blew past all those levels like a rocket.
5. As Sir John Templeton said - This time its different - these are the most dangerous four words in the stock markets. It doesn’t mean that the markets will react to the same set of events in the same manner
6. What doesn’t change is people’s behavior under Greed and Fear. It helps significantly more to analyze/predict people’s behavior if similar set of events play out compared to analyzing the repeating event
7. Most likely the next crash will be from a risk which we are ignorant about or are unaware of.
Points in Favor of Bull Run in India & Emerging Markets
8. Note that US equities are currently ~40% (i.e. $40 tn) of the world equities in terms of market value (i.e. $100 tn). They were below 30% when the uptrend started in 2008.
9. Dollar index has reversed its 10 year bull run and EMs do extremely well during a weak dollar environment.
10. Global equity value as a % of total financial stock (Source: Credit Suisse) is only at around 25% compared to 38% reached in 1999. So even though equities may seem expensive in terms of PEx or as a % of GDP, they are not expensive (or even cheap) vs other financial asset classes.
12. Low inflation, low bond yields and easy liquidity environment will continue across the globe for a long time to come and will support equities
13. EM equities have been flat since 2008 and have crossed previous highs after a gap of 12 years
14. Corporate India has deleveraged and has the strongest balance sheet in history. They are poised for growth.
15. Government has shown urgency in pushing multiple reforms (labor, farm, land, tax, privatization, divestment, attracting FDI, export incentives, etc.) when pushed to the wall. Who would have thought that post COVID, a high fiscal deficit (even double digit) will no longer be a concern for the rating agencies or bond yields
16. Budget was continuation of the growth steps that the FM has taken over the past 18 months, starting with the corporate tax cuts, low income taxes on new manufacturing units and PLI schemes.
Points in Against of Bull Run in India
15. NIFTY valuations are > 3x of the levels in 2003 when the previous bull cycle had started
16. Banking system is still under stress and hence credit growth will be extremely difficult. GDP and hence earnings will struggle to grow without credit growth
17. Recent earnings momentum is temporary in nature and there is no proof of it being structural or sustainable. In the meantime FOMO and Greed has gripped the investors as they are extrapolating this trend
18. World is sitting on the highest level of debt/GDP ratio and inflation as well as bond yields have started picking up. Higher bond yields will act as strong gravity for the market valuations as well as levels.
Has a New Bull Phase Started? Is it 2003-07 or 1991-92 or 1999-2000?
"That was a global cycle and needs too many variables to align which is extremely difficult to predict. In addition, in India (2003-07) we had a very loose lending environment and the appetite for risk was very high. All such factors aligning would be difficult when our banking system is very careful and just emerging from the worst stress. There could be a bull cycle emerging but it most likely would be of a very different nature with very different industries benefiting"
Micro Level Financial Data to Judge Indian Corporate Cycle