Future of equity markets and investors including speculators

Watching this market go up in frenzy since early 2003 always made me wonder on the modus operandi this time.

As you may be aware, we have a bull and bear cycle of around 5 years and due to the Product life cycle and industry life cycle coming down to around 3 years, the life cycle of bear to bull of short term equity markets are also expected to come down from 5 years to roughly 3-4 years. Due to demographic advantages, India probably is on a 20 -25 year bull story punctuated with value corrections. This means the following:

• Equity markets would be witness to unprecedented volatility even intra day

• Markets would rise and fall on volumes but maintain bullish trend

• Index may cross 30000 in 2 -3 years and also see bottoms of 16000-17000

• Retail investors may be bewildered by the suddenness of falls and rises

• Mutual Funds would become the favourite investing asset class for retail investors

• Direct Equity investments would gravitate towards quality mid cap and large cap

• F & O would rule the trend in the cash market in the short term

• Liquidity may be the single most important factor in the medium term

• Earnings of companies would be vital factor in the long run

• Growth in sectors like Pharma, IT, BPO, KPO, Telecom, Gems & Jewellery, Auto & Auto ancillaries, Biotech, Infrastructure related sectors, Financial services and Metals would give momentum to the market for the second leg of the rally

• Debt markets would lend a hand to equity due to emergence of Arbitrage & ETF products both institutional and retail

• Currency and Oil may cause short term trends but Indian economic growth may override it though performance in terms of earnings would have to be sustained

Politics would rule the roost in the years 2008 – 2010 and the markets would take cues from these developments especially in Bihar, Gujarat and Tamil Nadu. The markets at a stratospheric level would be prone to tremendous downsides and tremendous upsides going all the way to 30,000 or maybe even 40,000- 50,000. That is a volatility of around 35%. Speculators beware your death knell may come sooner than anticipated. Investors beware of speculating and invest systematically either in equity or in funds to ensure a safer future.

Theory of 250 years

I now try to shed light on some economic learning that I have ingrained in the last 24 years in these markets both nationally & internationally. This relates to the 250 year cycles of economies and its trend and thereby its impact on corporate, social lives and investors. Please note that these are just my studies and may not be construed to be biblical and each investor may study it and implement it if he is convinced.

• Every country/economy or bloc goes through a cycle of around 250 years in its evolution

• The 250 years are broken up into 5 cycles akin to the Elliot theory of 5 waves

• The first 50 years are one of setting up the basic structures like Judiciary, finance, administration, industry and other frameworks for efficient running of an economy. African countries are here.

• The next 50 years are spent in strengthening the frameworks of the economy and growing them. Eastern bloc is here.

• The 3rd 50 years are the real growth and wealth creation phase and this is the phase where India is right now in. The other countries are China, Russia, Brazil, Malaysia and maybe UAE

• The 4th 50 years is when the growth slows down and consolidation sets in and the existing infrastructure becomes inadequate and bemoans the lack of quality, but due to the earlier growth paradigm the economy still retains the wealth creation capacity. Some parts of Europe are here.

• The last 50 years is one of degrowth, decay, wealth destruction, chaos and then destruction. This is the last stage in the cycle of economic evolution. In case the economy is able to pull up its socks and reinvent itself through what I call as Constructive destruction then the economy shifts its paradigm into a new cycle of 250 years. Probably US is here, though given the tenacity of US, a bounce or redefining of cycles are not ruled out.