Around Diwali last year when equity benchmarks were consistently making new highs, every second market expert was saying that India had now entered a multi-year structural bull market. By December end, after the meltdown in crude oil and the Russian rouble, most investors appeared to have tempered down their expectations.
The widely held view among market gurus now is that 2015 is unlikely to be as great a year as 2014 for equity returns. This forecast seems to be based on a belief in the law of averages more than anything. Last year’s Nifty return of 31 percent was the best in five years, and most investors can’t still believe their luck. Even those who firmly think that India is in the midst of a multi-year bull market find it hard to believe the market can rise 31 percent two years in a row.
But this has happened in the previous bull run, and not once, but three years in a row. Of course, this is not to say that it will recur in the future just because it has happened in the past. But the broader point is that consensus view on the likely returns in the coming year has been way off target too many times for investors to use it as an indicator.
In 2005, the Nifty gained 36 percent. That led many pundits to predict that equity returns in 2006 were unlikely to be as good, and that the market was likely to consolidate for a while. That forecast seemed spot on when the Nifty slipped into negative territory by mid-June. But the index reversed course from then on and closed the year with a 40 percent gain over the previous year.
After two consecutive years of handsome gains, most pundits felt the law of averages was bound to catch up in 2007. Accordingly they warned investors to keep their expectations realistic even if the trend was likely to be positive. The Nifty rose 55 percent that year.
By now, market experts were of the view that this party was likely to continue forever. Fancy (even atrocious) Sensex and Nifty targets were bandied about, and the camp of prophets calling for caution had shrunk considerably.
But 2008 turned to be a disastrous year, with the Nifty crashing 52 percent, way more than the wildest imagination of the most die-hard of bears.
For 2009, the consensus view was one of more gloom ahead. It was based on the assumption that things were likely to worsen further globally, and India would not be immune to the turn of events.
But global markets rallied in 2009 thanks to the monetary stimuli in US and Europe, and India was among the best performing markets with a 76 percent return.
It is a much different world than what it used to be back then. And no two bulls markets are driven by the same factors, even if there may be some common elements like liquidity for one.
Anecdotal evidence shows that markets tend to rise when the majority view is cautious and fall when there are too many optimists around.
Past may be no indicator of the future as far as financial markets are concerned. But if there is something the markets love to do consistently, that is proving the majority wrong.
Also read: Market gains in ’15 unlikely to outperform ’14: Morgan Stanley