Getting a déjà vu of 2003-2008 bull market: Atul Suri

Atul Suri, CEO, Marathon Trends – PMS, says “stocks that fall less in falling markets are leaders of the bull market. India was a leader and I think it is showing the characteristics of leadership. And where leadership was visible in India, also continues to show. If the Nifty would fall 7% and everyone was unanimous that smallcap is a bubble, that excesses have happened, smallcap should have at least fallen 10 to 15%.”

Suri also says: I get a déjà vu feeling of the 2003-2008 bull market because the sectors and themes that are moving are very similar to what had happened then. We were in denial for a long period of time. It is only after 2008 that we realised, oh my God, it was such a big bull market.”

Exactly a week ago, we said Thank God it’s Friday because global markets were messy. Today we are saying why is it Friday because global markets are looking solid.Do you think that storm or the midair turbulence is over for us and are we getting ready for a Santa Rally?

It’s been very positive. One must consider that almost a month ago, on October 6, this whole Hamas-Israel issue that cropped up. We do not know the collateral damage, how these things spread. And in the hotness of the moment, a lot can happen. And that is represented by crude. Crude was around $80 to $83, Brent, it went to $95. It was almost a 15% up move in crude, which is nothing but a reflection of how bad it could get. But now crude is back to $86. So if you look at it numerically, this gives us a sense that actually the world has dodged a bit of a bullet because this thing could be big because Israel is a bit of a quasi-US representative. So from that point of view, I think that is a very big digestion.

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Now, what has happened is that we will find global markets have corrected 10, 11, 12%, plus there has been the Fed issue, which we will talk about later. But we have digested a very big bad news. The markets are recovering, which is giving me confidence that in the overall scenario we are in good shape. That is the typical reflection of a good, strong global market. This is such a big bad news. A war is happening out there and that is getting absorbed. And today, even if you look at something like the US, which corrected about 11% SPX, is about 7% from lifetime highs. If the momentum continues, I do not see why we should not get to higher levels.

So we have dodged a bullet but does that mean that we are ready to run or will we still be walking?

Now the attention will move back to the Fed. If you look at Fed’s action in the last few days, the issue is inflation. If inflation remains cool and whatever, you know, the variables that get into it, you will find that happening in bond yields. So, just as we spoke about Brent crude, we now need to go back to bond yields. What you are seeing in the last two days or three days is nothing but a bond yield that went to almost, tipped five, right? And now we are back to 4.66% or thereabouts. I think we will get to around 4.3%, which is great because we are not expecting it to fall off massively.

But the further we are away from five, it is really good. It is all about narrative, etc. But I do think that markets are oversold. They are due for a bounce. The quantum of bounce is really going to be based on news. News is kind of ever flowing, especially as far as the Fed and inflation, go. So I would like to point out one thing. One big takeaway for me in this whole correction is that, again, India has fallen less than global markets. The SPX fell 11%. We fell 7%.

It is a bull market correction, very savage, very sharp. Before you realize correction has started, it actually gets over.

Absolutely. So the fact is that we have fallen less. Let me surprise you: what was thought to be an absolute bubble in Indian stock markets was smallcaps. Small caps have fallen less than Nifty.

In fact, from Thursday’s lows, the small cap index has rebounded 6.5%. It fell 5%, it is up 6.5%, which means the net neutral impact is actually 1%. So for the next three months, what kind of market are we in? Are we in a trending market or are we in this market where you will crawl? It would be two steps forward, one step back. So the trend would be higher, but it is going to be a crawl, not a giant leap forward.

I feel it will be calibrated. As I said, it is not going to be runaway. The next area is 19,850; then we have got 20,200. These levels are there. But sooner or later, they will be taken out because as we are positioned, we have had a correction, it is great. It is always good to have a correction because things were getting too euphoric and a lot of stuff was moving. That has all corrected. But as I said, the quality of correction is very important.

I love to do my research in corrections because stocks that fall less in falling markets are leaders of the bull market. Markets that fall less and as I said, India was a leader and I think it is showing the characteristics of leadership. And where leadership was visible in India, also continues to show. You know, if the Nifty would fall 7% and everyone was unanimous that smallcap is a bubble, that excesses have happened, smallcap should have fallen at least 10 to 15%.

It fell about 3% only, right?

It fell about 5%. And I think we are just maybe 1 or 2%, depending on give or take where we are today. So the fact is that, and I have a thesis for that. I mean, we did some work, we realized that, you know, what is it? Of course, the important thing is the FIIs are selling, which tends to be in largecaps and domestics tend to buy. So that is, of course, that apart but we feel that the sectors that are trending, or sectors where the themes are, they hardly have a representation in the large cap index.

If it is capital goods, engineering, infra, industrials, barring an L&T, which is a largecap stock, if you need to get into the sectors, you have to buy a small or mid cap. So if money flows into these sectors, as I said, we are trend investors and we see that the trends are in these sectors. If I have to buy something in those trending sectors, I have to go to a small and midcap space. The pressure that is there, the trends which are less relevant are going to be the private banks and IT. And if you look at that, they are all the biggest caps in the market. It is actually the sectoral shifts that are happening in the market, which is really causing this kind of behaviour.

Talking about the trends, the biggest trend that we have seen this year is the real estate sector. That has, of course, made a bit of a comeback. But given the fact, you know, cycles are getting shorter, whether it is a bull cycle, whether it is a bear cycle, what about this real estate cycle because we have already seen the cycle turning for the last two years now?

Again, the interesting part is in this fall, you rightly pointed out that the only sector that made 52 week highs is real realty. So that is definitely one big positive. But the question is as to how big do we make the frame? Let us go back 10 years and let us see how real estate has performed. You will find that in the dog sector for the last decade, there were two dogs, I tell you; one was PSU banks. They were the best performing last year, and they are the best performing this year. And real estate is the last one, left still. If you extend your time frame, you will realize that I am not talking about one week, one month. But the fact is that when you have such a big revival in the market, when sectors after underperforming for a decade move, the rallies will not end in a few weeks or a few months. They tend to be very elongated.

And case in point is PSU banks. I mean, the trade of the last decade was long HDFC Bank and short any PSU bank. And if you see the trade of the last two years was actually the reversal. And we can talk about it today. But if I told you that two years ago, you say, listen, boss, what are you smoking up because it was a decadal move. So it takes time. It takes time to adjust.

Coming back to the PSU bank trade, there was a crop of traders, investors who got in early, played the absolute low hanging fruit and then SBI, BOBs of the world went through a sideways move. Is it providing an opportunity to get in once again? Do you think it is giving time to get in once again?

I think so. I feel that what has happened is that they did run up, they surprised us. They have corrected. Every sector, stock has to correct. But as you see, I am already seeing that in the last few days, some very good early breakouts are happening which gives me a sense that in the next round also, these will participate and they have not topped out.

I wanted to come back to the point, you talked about the dogs of the last decade, which are the dogs you are identifying right now which we will talk about two years from here on? Also, at what level will you find private banks attractive?

My style of investing is I buy strength, I sell weakness. So, at the end of the day, I do not know which sector when, okay. I will wait for it to move but the important thing is what I look for, because at the end of the day I am a portfolio manager, I have 20 stocks, I have 20 bullets. I really do not have the luxury of holding stocks for two-two, three-three years and waiting for them to bottom out. So, I like to buy strength.

Sectors where we are seeing strength, I mean, we are extremely overweight are: electrical equipments, capital goods, infra. This continues to be our favourite but where we are seeing interesting stuff happening is real estate. We are not overweight, we are underweight large private sector banks but we are overweight NBFCs. We do not have any largecap IT, but we have some midcap IT.

You do not own an HDFC Bank?

I do not.

Very few fund managers do not own HDFC Bank.

I have not owned it for the last three years. I think after the Covid fall, I have not revisited.

So, are they in this long winter private banks?

One does not know. That is what time will teach you or history will teach you. We did some work. When I came to the market 1992, the Harshad Mehta Bull market, the Sensex had the top 30 stocks. As of today, only five stocks are still in the Sensex.

Actually less, I think.

No, I think….

Tata Steel would be there.

Reliance is there, etc….

Reliance is there. Yes, from the original, I think only two are left.

No, We have done work. From 1992, Sensex, only five remain and they were the best of companies. In fact, you will be surprised that only eight stocks have actually beaten the benchmark over 30 years.

Yes, look at GE. You would never say that GE could be on a verge of collapse and look at GE. So, every company has a shelf life.

Premier Automobile, Hindustan Motors, they were part of the Sensex. In fact, these companies used to have a waiting period for cars.

So, money is not made by looking at history. Money is made by looking at futures.


What could be part of the Sensex three years from now that is a better question?

I think that is a very relevant question and as I said what is going to really change is that the last decade was dominated by two sectors, IT and private sector banks. I have a feeling that a lot of sectors have been ignored. Like, we spoke about real estate, we spoke about capital goods and infra. I feel that these will actually re-emerge and we will see a higher weightage or a lot of stocks would actually enter from this phase.

I am a student of the markets, that we are setting up for an industrial revival that has eluded us in the last decade. That is why these few narrow kind of defensive plays worked out but the way the market is positioned, the way stocks are moving, the way the numbers are coming out, I think we are set for an industrial revival and as I keep telling people, it may sound a bit boisterous, but I get a déjà vu feeling of the 2003-2008 bull market because the sectors and themes that are moving are very similar to what had happened then.

Of course, we were in denial for a long period of time. It is only after 2008 that we realised, oh my God, it was such a big bull market. But I do get a sense that once an industrial revival happens, that is the potential and the kind of bull market India can see.

Maneesh Dangi says “I know that everybody is talking about 2003-2008 kind of a market coming back but look at the index and let us look at the two-year index return. The index has not given great returns. So, if we are in that kind of an economy and if we are in a 2003-2008 like bull market, when the index went from 4,000 to 21,000, there is no evidence of that happening.

That is the perfect setup, that is actually the perfect setup. If I was talking to you after a 70% up move in the index, tell me what is my risk-reward ratio?

Are you saying that we are in for that kind of a gain on the Nifty?

Yes. I mean, I do not think in the 2003 to 2008 bull market we are in 2007 yet. I think we are more towards 2003-04. So, what I am trying to tell you is that always the returns that will come will be lumpy and there is an alternation. If I was sitting on 70% return, my risk-reward ratio would not have been in favour. The interesting part is that actually in the last two years, for whatever we are saying, the indexes have not done much.

We talk about real estate sector, what have these stocks done in the last 5-10 years? I mean, they have destroyed wealth. So, the fact is that wealth was created in a few niche pockets in the last decade, so-called the 50 quality stocks or 60 quality stocks. The market is getting broad-based and that is to the point we spoke about, the smallcap index. If the market, if the Nifty fell 7%, the smallcap index should have fallen at least 10% if not more than 15% and there is unanimity that it is a bubble. So the fact is we are coming off muted performances and that is if you have an industrial revival, the quality of rally and longevity of those rallies are always special.

I want to talk to you about this industrial point. The capital goods index on a longer-term frame, started moving and made all-time high, multi-year high, decade high and then went to a sideways move because the largecap components retraced. Perhaps a little more correction happened in the mid-large engineering companies. Do you see opportunity in mid-to-large ones or the top-end of the capital goods?

I think there are a lot of opportunities there. I agree with you that largecaps in these spaces are so few and that is why they have attracted those kinds of valuations. But when you look at the mid and smallcap space, you will find that the number of stocks are plenty. They have been under-owned and ignored and the interesting part is that these are the survivors. After going through the difficult time they have had, companies and businesses that have survived in this space are definitely the guys who are able to withstand difficult times and I think that they are going to be rewarded and that is why you are seeing this kind of catch-up trade happening here.

So, you have not held HDFC Bank for last three years, but which is one stock you will not sell for the next three years?

I do not know.

As of today, if you have to take a view.

In my style of investing, as I said, I am a slave of strength. I realised that over the last 32 years that ultimately the big wealth has been created in pockets and the quality that all these stocks showed was they continued to show strength.

Roy Walsh

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