September 15, 2014 marks the 60th anniversary of the filming of one of the most iconic images in cinematic history – a delightfully uninhibited Marilyn laughing as the updraft from a Manhattan subway vent billows her skirt skyward. Such is the allure of this glamorous scene – from the classic The Seven Year Itch – that Marilyn’s white dress fetched a record $4.6mm in auction. For perspective, this is almost 5x what was paid for Audrey Hepburn’s memorable little black dress from Breakfast at Tiffany’s.
This piece of Hollywood history may well be the least obvious place to look for clues to the gyrations of the Indian stock market. But the answer lies in the title itself, or a temporal variation thereof. I call it The Ten Year Itch. Alternatively, paraphrasing Mark Twain paraphrasing Voltaire, history never repeats itself, but it rhymes every decade. Add to that yet another (paraphrased) cliché – there’s a sucker born every ten years. If you still don’t get it, here’s my point. India is and always has been a net importer of capital with a relatively fragile balance of payments and a notoriously illiquid stock market. Roughly every ten years an entirely new crowd of fund managers in Manhattan wakes up to the screamingly obvious D’s of Delhi – democracy, demographics and demand. (There’s dirt too, literally and metaphorically, but for that read Rana Dasgupta’s excellent Capital). Invariably fueled by the likes of Helicopter Ben, and lately his Japanese and European kin, testosterone levels rise, animal spirits revive, and risk capital finds its way into India, seduced by its impossibly articulate entrepreneurial snake charmers. Wtf, unlike the Chinese, they even speak English, how cool is that? And while a few billion dollars of buying/selling barely nudges AAPL or GOOG, in India it creates a loud blowing (or alternatively, sucking) sound.
To be clear, there is usually some method in the madness of crowds, even in the seemingly irrational financial markets. There is invariably a catalyst that directs risk appetite toward India in these liquidity driven market runs. In the early 90s, the story was Rao’s reforms, ostensibly engineered by his erudite Cambridge educated Finance Minister, but in reality mandated at gunpoint by a multilateral bailout. Predictably, once the IMF relaxed its trigger finger, normal service was resumed with the economy gravitating toward its meandering path. In the millennium, the excitement was around Thomas Friedman’s The World is Flat narrative. Paraphrasing again, this time JFK, ich bin eine outsourcer. Never mind that no country has ever skipped the essential step of a vibrant employment-creating manufacturing sector as a forerunner to a services-oriented economy. Aided by the largesse of US monetary policy following the tech bubble bursting, Indian markets took off and partied like it was 1999. And now ten years on, with Signor Draghi and Kuroda-San eagerly accepting the baton the very dovish Ms. Yellen appears ready to pass on, the tsunami of money hits India again, the story this time being great expectations around the intrepid messiah Modi.
But as the markets are swept away by the euphoria surrounding a new regime, lets pause and reflect on the nature of this rally. Clearly, global risk appetite has much to do with it, as does mean reversion given the annus horribilis that was 2013. It seems fashionable to run down the vanquished old-guard, but much credit is due to our avatar Raghu Rajan and the erstwhile finance minister Chidambaran for acting decisively and in a co-ordinated fashion to engineer an improved capital account and fiscal deficit picture, which was an essential pre-requite to this rally. As for the election itself, here’s the thing – markets invariably rally following major leadership changes, not just in India but (for example) recently in Mexico, China and Japan. Empirically, these rallies tend to be ephemeral, and moreover the historical data does not support the view that political stability alone correlates to economic growth or market performance. Yet there is no shortage of analyses justifying and projecting ever higher targets for the Indian markets – macro regressions, valuation comparison, fund flow data suggesting increased domestic participation. The harsh reality is without truly meaningful action – of which there has been very little thus far – to address the well known structural bottlenecks that have traditionally held India back, this rally seems destined to follow the pattern of decennial foreign liquidity driven phenomena. In other words, this is likely not a “new era” secular bull market. After the initial “pop”, we’re currently in a consolidation phase, following which – event risk notwithstanding – we’re likely to see a final “blow-out”. Not unlike Marilyn’s dress.
My bottom line? As the legendary David Swensen (who manages Yale’s $20bn endowment) once told me, markets like India tend to be momentum trades, and market timing more than stock selection is key to outperformance. We’re in that sweet spot now, and 9,000 for the Nifty and 30,000 for the Sensex – event risk notwithstanding – seem eminently reasonable medium term targets. So think of Marilyn’s seductive smile and know that the sex is back in the hitherto limp Sensex. Enjoy the experience, just remember to pull out in time.