stock market outlook: 2004 revisited? Next up move to take Nifty to 21,500; we are set for a buy-on-dips market, says Atul Suri

The composition of the sectors is giving me a sense that as a country we are likely to see a revival of industrial activity. When such bull markets start, they tend to be very long. I dare say that we will outperform the US markets also, says Atul Suri, CEO, Marathon Trends -PMS

Jackson Hole has come and gone. Is the Indian market outperforming relatively and on an absolute basis?
What has happened is that October 21 was the high for most global markets and we have been correcting in a channel. We have spent almost 11 months in corrections. And in those 11 months, the index may be 5-6% up but the pain in portfolios is a lot more because the growth space has suffered a lot more. like the tech index is down 25% even right now. So the pain is much more.

We have had 11 months of correction and we have had price correction also which is much more than optically visible. There is a lot of negative news and sentiment. In fact, yesterday I was reading a survey of fund managers that said the next 10% move in S&P will be up and down or down; 70% felt that it would be down and so the mood is pretty negative.

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Yes, there are issues with the Fed, there is the narrative and there is fear that in the short run, there will be pressure on the market but I have never seen markets fall off massively after 11 months of underperformance and correction. The sentiment is bad and this is a great time for India to buy on dips. Yes, we will correct along with global markets but we will correct less and this offers a very good opportunity for investors to deploy money because we are on the cusp of something very big.

This is a phase where I almost get a 2004 deja vu simply because of the way the sectors are moving and the market is shaping up.

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I have become very bullish. If the corrections are there people should use this as an opportunity to deploy money.

Then why buy on dips? If we are in a long haul bull market like Rakesh Jhunjhunwala used to say, if has to go from Rs 500 to Rs 1000, it does not matter whether you bought it at Rs 600 or 700. The problem with buy on dips is that you do not know what is the right definition of dip?
Again, it is for people like me who are in the market, who look at market closely but definitely for some people who are a little distant from it, that phase comes whether you do it in a systematic way or you do it at one shot. The phase for buying is coming, the phase for buying on dips is coming, at what price you buy and what you buy is obviously a much different discussion area.

Where can Nifty go in this cycle?
The first move came when we are sub 18,000-17,500. We could head to around 21500.

In this year do you see that happening?
I would not give a calendar month and things like that but I feel the next leg up should take it to around 21500 but I think this will be just the start.

So the party does not get over at 21,000?
No, I think the way the current technicals are shaped up, the next up move will take us to 21500 but as I told you that the way I am seeing the themes internally I am getting a 2004 deja vu moment.

Let me explain; the leadership sectors now are not the ones that have done well for a decade. In fact, they have been the more defensive places. Those were sectors we went to when there was no massive industrial activity. Today leadership is in autos. Autos is a very good secular theme, a proxy for industrial activity, capital goods and we will find a lot of PSU banks, sectors or themes which are very closely linked to the industrial cycle and they have not done well for a decade. This is where under ownership is and here is where I am seeing leadership.

In fact, if you take the October high to now, in all these sectors, the indices are positive.

On the flip side, there are sectors which were defensive plays, which people ran to in times of difficulty like pharma. It is 10-11% off; IT is 25% off. So, the internals of the market, the composition of the sectors is giving me a sense that as a country we are likely to see a revival of industrial activity, which has been eluding us for almost a decade. When such bull markets start, they tend to be very long.

I dare say that we will outperform the US markets also.

“In the real world we find that cycles have become much sharper, much shorter and IT is a case in point. If you did not have IT in 2021 you were committing a sin and if you have an IT in 2022 you are committing a sin.”

— Atul Suri, Marathon PMS

Which is what we have done from Jackson Hole, if I look at very myopic data points…
In the short term, yes.

They are down 6% which means we are up 6%?
Let me put this in a longer term data. We do something called a ratio chart, a ratio is nothing but the relationship of one index versus another, the runaway market for the last many years has been the US and the S&P 500 is a good proxy for that.

Europe is a basket case, emerging markets are a basket case, the big driver is the US and let us take SPX. We do a ratio chart between SPX and Nifty 50 and we feel that we are coming out of a 10-year range in relation to SPX. So Nifty in spite of doing very well has relatively underperformed or has not outperformed the SPX but what we see is that that relationship is working towards going in favour of Nifty after 10 years.

So this is similar to my earlier thesis that India is seeing a revival of the industrial cycle and irrespective of the global developments, our relative outperformance will continue and I think this time we will outperform the US markets and emerge as one of the strongest.

Looking at the fact that we are frankly not very far away from an all time high on the Nifty…
We were what 4% away from 18600 till a few days ago.

How much more do you think this bull market will accelerate before we talk about the euphoric or a market peak? If this is the beginning of a bull market according to your analysis, then where will this bull market extend itself? Are you looking at 30,000, 35,000, even beyond 35,000 on the Nifty?
See one would like to believe in those numbers but I feel that what is going to matter is the delivery in terms of numbers and economic activity. These are early phases, but as I said, whenever I have seen these sectors emerge, they do not end in one quarter or two quarters. They really tend to be two-three-four year cycles. And that is what we saw in 2003-04. It went on till 2008 and, of course, excesses happened on the other side also and economic world conditions were different.

Those are, of course, lot of variables but if I look at it as a narrow stage, there is a cause for bullishness. I feel 21,500 could be the first stop and if the commodities and there are many other asset classes at play, if things fall in place I feel that we could actually start an extended move makes me very-very optimistic and that is why I feel that I this fall that is happening due to global tremors it is a buy on dip opportunity.

One of my favourite questions at least with Rakesh Jhunjhunwala was that if the bull market is like a train journey starting from Churchgate to Kandivali, where do you think in your analysis this bull market has reached?

I think we are at the first platform.

Okay so we have not even reached Bandra?
No, no we have not at all. In fact, we are still somewhere out there in the start phase.

So this is the beginning of the bull market?
Absolutely. If you look at the sentiment, the indices.

I am not speaking about one day, I am speaking about one month. As I said I am getting a déjà vu about the internals of the market. It is the sectors, it is the breadth, the midcap index .Interestingly, the smallcaps are not doing too well in this kind of retail euphoria.

Last week, the smallcap index was down 20% from its peak. I have not looked at this week’s data.
What we saw a few months or maybe six-nine months ago was a very big outperformance of smallcaps which is a very big representative of retail activity where lot accesses happens but this is you see the move is more into mid to large and I think that that is a very sweet spot and that is where we find ourselves sectorally thematically and these internals make me positive. See what is happening in the macro space and all is very wide. A lot can happen but as things stand, as data shows me, right now makes me very positive.

We are spending some time on this 2004 comparison but between 2004 and 2008. the world also did very well.

You have compared this year with 2004. But in 2004, commodity prices did very well. Liquidity moved into a different zone. On all those parameters we are staring at a different scenario. Commodity is coming down, liquidity is going to be contracting. So while it may smell like a 2004 bull market, it does not feel like a 2004 bull market.
What I feel is that this time it is not going to be very global in nature. When I talked about this ratio, the S&P or the US may do nothing for a couple of years but India would relatively outperform.

So the size of move may not be there but the relative outperformance in my view will be there. I feel one very big thing that is going to happen which will surprise the world is the crack in commodity prices. Today inflation is the root cause of problems and why interest rates are going up, why liquidity is being tightened. The inflation is massively led by commodities. When I look at underlying global commodity prices I feel a 30% correction likely to happen.

Would you go short on commodities then?
I would think so.

Across the board?
I would think so and what is going to be very interesting for India is if we see a crack in crude, like Brent crude, I see that none of these commodities’ demand is at record highs or we have still reached pre-Covid levels where what has happened is that there is a lot of speculation. Crude price is a function of politics. Geopolitics is at play and that can change very fast.

I think there is going to be a very big correction in commodities and while today the central concern for us is inflation, three-six months down the line, it will not be the centrepoint.

In fact the talk is going to be growth and that is why I feel that the Fed is not going to be as aggressive. It has been changing its commentary every few months and this can also change very fast. Right now, they are extremely hawkish but that can get very neutral, very soon.

If commodities crack, it is very positive for India, especially in the energy basket and for a lot of Indian companies because the raw material costs will come down.

They have all taken price hikes, the top lines are there, the demand is there but the margins are getting compressed. If raw material cost comes off, I do not know how much they will take a cut in prices but the profitability will shoot up and that could be a very big trigger.

The narrative this year has changed almost 180 degrees?

At the beginning of the year it was everything digital. Today we are saying goodbye to IT. SO, the narrative of decline in commodities could change in three-six months?
My biggest learning in the last two years post Covid is that the length of cycles has reduced. We would look at a 3-5 year cycle. In 2000, the sector to have was pharma. It is down in the dumps now.

2021 was all about IT, it is down. 2022 has been about commodities and metals for that matter, I feel would be the next. So the cycles have become very sharp and very fast and as fund managers, we face a lot of challenges because one has to churn the portfolio hell of a lot because to create outperformance, one has to be with the trending space. But that is the new reality one has to live with.

Ultimately we are slaves of returns, I would like to hold the stock for 10 years, for my life as Warren Buffett would say. But even the great man does not hold it for life.

In the real world we find that cycles have become much sharper, much shorter and IT is a case in point. If you did not have IT in 2021 you were committing a sin and if you have an IT in 2022 you are committing a sin.

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