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Observing the Opportunities in Despair

Observing the Opportunities in Despair
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In the hindsight markets are always in our control and we would have made the best possible decision to generate profits, however the reality is much different. The more we educate ourselves about the stock market, the more complex it gets. In our experience one of the keys to consistently outperform the market is to understand market cycles which in fact are predictable in nature owing to how they have behaved in the past. This can give us a blueprint as to what may lie ahead and we can make better and more fact driven decisions.

Let me guide you to finding the order in the chaos in the markets. The stock market follows its own cycle of peaks and bottoms lasting for a period of approximately 8 years. These cycles are made up of smaller cycles within them which puzzle the participants with frequent declines and recoveries. Knowing that these smaller cycles unfold into a bigger cycle is most rewarding. Identifying stocks and entering during cycle up-moves and exiting when this cycle matures creates great returns for the investors.  Market cycles are made up of complex combinations of various sector cycles wherein if one sector reaches peak valuation it tends to correct and other sector takes its place until all sectors reach saturation in terms of valuations.


Spotting long term trends through the lens of Market Cycles, stocks and sectors have been alternating during these 8-year cycles for performance. On an average stock that rallied during 1992 cycle played subdued during the 2000 cycle and ran up during the 2008 cycle.

All in all, the market cycles too alternate in 8-year phases. The 2000 cycle gave much higher returns (30% CAGR) than the 1992 cycle (15% CAGR). Going ahead the 2008 cycle gave subdued returns (25% CAGR) compared to the previous period. The current cycle that started in 2016 has a promise of delivering greater returns than the 2008.

Going ahead the second half of this cycle is likely to have a broader rally and with better returns (50% CAGR est.).


In terms of valuations these market cycles tend to oscillate from 9 times during the lows to 22 times 2 year forward earnings at the peak. In the past 3 decades whenever markets have peaked, on the edge of an 8-year cycle, Sensex has been in the range of 21- 22 times 2-year forward earnings.

In the near term: Currently we are trading at around 16 times 2-year forward earnings and therefore we strongly believe this rally has got legs and Sensex could mature at around 60 thousand which will be nearly 21 times 2-year forward earnings. This presumption comes with a caveat that this rally has got to pan out in few months from now.

On Completion of the cycle: At a growth of 20% we strongly believe that by 2024, earnings will support Sensex to reach our target and peak out at 21 times 2 year forward.


Illustration 1.0 – Projections Based On Market Cycles

Given the growth prediction and valuations unfurling into a laid-out path for the markets to perform, at 22% CAGR from 2016 lows and at 21 times 2 year forward earnings Sensex is forecasted to reach 1,12,641 level and the BSE market capitalization to reach from current Rs 197 trillion to expand to Rs 345 trillion.

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Observing the Opportunities in Despair
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