Market view: S Nagnath DSP Merill Lynch

Why should you know Nagnath’s view on the market? When the whole world was pessimistic about India he predicted huge cash inflows. I may not be too wrong if I say that he predicted the bull run in 2002, not in 2008! He always has a balanced view and gives excellent quotes and views to the media.

This is what he had to say at the India equity show – a show organised by at Worli, Mumbai.

When quizzed about the Golden rule of investing, Nagnath quoted somebody (Anon) and said “The man who has the Gold makes the rules”. Apart from sounding good I guess what it means is the importance of cash flows. If the valuations are good, the market is attractive. However for the market to go up, there has to be somebody who puts in the cash. My personal view is that the money can come in from Unit linked Insurance and mutual fund sales – to compensate and more than compensate the FIIs taking money out of the country.

One thing apart from liquidity predictions and analysis is that many people who predict things may get it wrong. When the US $ started getting weak and there was a need for many Americans to go away from the US $, the cash flow caused the Emerging Markets and commodities to boom. Now if there is a reversal, we need to be ready for the same.

When markets go up, we rationalise. When markets go down, we rationalise.

Then he spoke about “regression to the mean” – if you are expecting say 15% p.a return over a 15 year period and you have had a bull run for 4 years where you got say 100% return, maybe you take some profits and keep it away. Similarly if you have got a -13% p.a. for say 4 years maybe you pump more money into the market. My take is “continue your SIPs, stay away from Unit Linked plans” theory will work well.

What causes this tendency of the market to run far ahead of earnings or lag the market for long periods of time? It is cashflow – created by euphoria or by excessive pessimism.

Nagnath also said it is difficult to take a long term view because of the crisis in the US and European markets. He called it an unprecedented short term market crisis – and similar crisis seems to have hit the western world only in the 1930s.

He took a nice dig at Bank balance sheets – and said that after the sub prime crisis, in a bank balance sheet if you saw on the “left side” there was nothing right and therefore quite obviously when you saw on the “right side” there was nothing left. He said that banks have very poor quality of assets funded by high leverage. We saw this in case of Bear Sterns, and now Lehman brothers is raising money for meeting its capital adequacy needs.

About the future Nagnath felt that the markets in the next 12 months are likely to be tough. He had no clue on whether we are finished with the sub prime crisis, are at the half way mark or in which leg of the journey we are. He felt the markets will be worse before it got better. He also predicted a market rally as and when the oil prices hit US $ 100 on the way down.

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One Response to “Market view: S Nagnath DSP Merill Lynch”

  1. Interesting thoughts. However Nagnath has not mentioned which kind of gold one should own. I have reasons to believe it is the black gold. Oil at $ 100 – I will have the last laugh on that one. Have you ever seen oil prices going down after the 1970’s?

    The only way the markets can come up is when someone finds an alternative to Oil and then everyone can make money.

    Believe me, there is a solution to every problem. Some are quick and dirty and lot of them are long term and clean. Let us wait for the Longer term Cleaner solutions.

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