Why simply waiting will not work?

2008 was the year of the last bull run. The previous bull markets happened in 2000 and 1992. Coincidentally, in the last two decades, bull markets happened every eight years. Investors bought equity most during these phases and the least during the lean years as the current one. What happened to the investments made in a bull market? Investors mostly held into them for long years hoping that they will recover in the next bull run. The best case scenario was they barely recovered costs. Profits were out of question. Why?

The reason is simple. Stocks which are fancied in one bull market become neglected in the next. The leadership of the stock markets change. For example, IT and dot com stocks which led the 2000 bull run never regained the high valuations ever again. Similarly, it will be safe to assume that power stocks will never regain their fancy valuations of 2008. Does anyone fancy BHEL now ? If  you continue to hold the stock, recovering your cost is the best case scenario.

So how can investors profit from the next bull market?
The first thing investors need to understand is that market leadership constantly changes. It is certain that power, construction and commodities will not lead the next bull run. Investors must focus on what will lead the next bull run and include those scrips in their portfolio. Switching out of commodity stocks is a necessity and the market trends of Reliance industries reflects what large institutional investors are doing. Selling out of investment themes of 2008 is a necessity. It is equally important to identify the winning themes of the next bull run.

What will be the leading themes of the next bull run? Services is certain to lead the next bull run. This would include domestic services and global services. Banking, IT, telecom, travel, healthcare, hospitality and engineering services are amongst a host of industries which will thrive in the coming years. India will become the automobile hub of the world. We have strong competence in small car and bike manufacturing. We are likely to grow our exports significantly giving the industry a strong future. As commodity prices soften, commodity user industries will stand to benefit. Consumption will continue to be a strong theme as rural economy gains buying power. Sunrise sectors like food, renewable energy will see strong growth momentum. Overall, the themes like power, petrochemicals, engineering construction and realty which dominated the 2008 bull market will continue to struggle on the valuations front.

What should investors do now?

Investors must switch out of the stocks that led the 2008 bull run and buy into the winning themes of tomorrow. Investments should be made after careful study of individual companies within the industries expected to perform well in the future. Investments should be made gradually and your portfolio should be built keeping the right balance between different stocks. Importantly, investors must have the courage to accept past mistakes and take corrective actions wisely. These lean years should be used to build a strong equity portfolio which can be sold out in next bull run. Buy Equity now when no one is buying. You will sell to others who rush to buy into the next bull run.Happy investing!

Written by Shyam Sekhar, chief Ideator, ithought. ithought is an equity research and mutual fund analytics firm.

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