We're all set for a bull run. Except that there are two problems, possibly. One, the bull run that we are set for has already happened. Two, the corporate earnings that have to be at the heart of any bull run haven't yet happened. Apart from that, we are all set.
That sounds like I'm making fun of the impending bull run, and I am a little bit, but not too seriously. You see, past experiences in the markets show that all large reversal events look unlikely just before they happen. Whether it was 2002-03, or 2007, or 2013, I remember those who felt that that the market direction would change significantly sounding misguided and perhaps even delusional. The human mind is most comfortable at extrapolating what is currently going on in a straight line. However, for that to happen, it has to be clear what is happening. When there is a whole mass of confusing signals and surprise events, like the pandemic, then it becomes harder, a lot harder, to figure out a direction, let alone a reversal.
And yet, at this point, the stars seem to be aligned for a long bull run in the Indian markets, firmly riding on the back of sustained economic growth. The reason: seven years on, the Narendra Modi government seems to have found a vigour for reforms at an intensity that hasn't been seen before. For close to three decades, we've got by with the easy parts or the obscure parts. That's not to say that they weren't effective, but they're no longer enough. However, the last few weeks have made it clear that this government will do the hard stuff and will not back down.
It's in the nature of substantial reforms that they will hurt vested interests. The well-funded armada of entitled rich landowners and middlemen, along with the usual suspects who have tried to create a fog of disinformation around the farm laws are proof of that. However, that's not all: there's now more proof than ever earlier that a new wave of reforms is coming, including all the hard ones. The emphatic talk of privatisation in the finance minister's Budget speech, followed by the prime minister's spirited defence of entrepreneurship and businesses as being central to the country's prosperity, is certainly a novel experience for any Indian. There are also the pre-virus rounds of corporate tax and procedural reforms, which often get forgotten in the excitement of subsequent months, but are just as important.
That's a high-level view of the path that the future could take. Down at the ground level, things are more complex. We have had an extraordinary few months of strong stock prices. The virus slump in the economy has faded away rapidly. The early fears of a long and deep depression have been substantially belied. Many, perhaps most businesses, have rebounded strongly. Even so, the run up in the markets is startling. The conventional wisdom is that this is a liquidity-driven rally. I find this a little too pat. Yes, the free flow of money plays a role, but it's hard to sustain this role for long.
For practical businesses and investors, this liquidity debate is useless. The growth of markets is like the growth of a plant. You need the soil, but the soil alone will not do the job. The soil, the seed, the weather, the fertiliser, the water - it's all needed. The liquidity is the fertiliser. It can cause some rapid growth, but for the plant to take hold and become a tree, everything else has to be right.
In a sense, this talk of the markets going up is also pointless for practical investing. There are businesses that are going to win bigger because of COVID and the wave of reforms, and there are businesses that are going to be losers. What matters is to understand what's happening and know how to make that choice.