On 28 October last year, the Nifty was at 2,685 while the benchmark Sensex stood at 9,008. Both have risen sharply since then. In an interview with CNBC-TV18, investorRakesh Jhunjhunwala, Samir Arora of Helios Capital, and Ramesh Damani, member, Bombay Stock Exchange, spoke about the Indian stock markets as a new Hindu year begins. Edited excerpts:
Would you have dreamt that this could have happened last Diwali?
Jhunjhunwala: If would have given me three slaps and asked me what my thoughts were in March, I would have said markets will go upwards. But that it would have this kind of rise, this kind of breadth, I wouldn’t have dreamt at all. It’s really taken everybody including me by surprise.
Market outlook: (From left) Investor Rakesh Jhunjhunwala, Helios Capital’s Samir Arora and BSE member Ramesh Damani. Jhunjhunwala says he doesn’t expect the Nifty to break 3,800-4,000 on the downside.
Damani: I was a fierce bear, but I now argue the case that I am a reformed bull. I argue the case that what we saw from October through March or earlier was just a break in a bull market. The intellectual strategy as Jhunjhunwala pointed out in 2003 is actually unfolding now. We are seeing a very severe correction within the bear market. The bull market is continuing. There is no other way to explain it. If that is true, this probably has more legs.
Arora: We are back in a bull market but the pace is a bit staggering. We would rather have a longer duration of a bull run rather than have this massive upmoves in a few months but it is good in any case. But if you look at the past two years, actually it is not just last year, it was unbelievable. Even the year before was unbelievable because we never imagined in November 2007 what would happen next year. So, the best thing is to do different from what you think. It’s better to act bearish today and then have great bull run for the next one year.
Do you think a trend has been rediscovered?
Jhunjhunwala: The mood next Diwali can be bullish or bearish which is difficult to predict. But I think the most important part of what happened in the last 12 months is that India as an economy has responded extremely well to what has happened in the world. In October 2007, I was expecting the markets to correct. In the first leg when the markets went down, I thought all of our wealth has gone. We were going through a stress test.
I think what has happened in the last 12 months is very important as an indicator as what’s going to happen over the next 10 years. What has happened in the last six-nine months gives me lot of confidence that India will grow at 8-10-12%.
Despite Wall Street slowing, India has respond extremely well. Sectors are growing. In the future also, the Western world might slow. But in spite of that, India is going to outperform because if commodity prices remain reasonable and if software exports hold and interest rates worldwide remain low, I see no reason why India cannot grow 9-10%. Now, there is a growing recognition that there is a lot of local money which is flowing into the stock markets of India. It is been led by a set of certain circumstances which cannot change, the vast savings, demographic factors, etc. The rise in the last six months gives me great confidence as a long-term investment and that is extremely important for me as an investor.
Do you think we are headed for a buying panic or we have seen that in part already?
Arora: I think there will be a buying panic this quarter itself because fund managers both foreign and domestic, but basically foreign, have not positioned themselves for 2010. I think fund managers, funds of funds, and other investors have made two mistakes. One is to sell too late in 2008 and then to climb back quickly in 2009. Effectively, they have written off two years of life. I think they cannot take this risk any more. Fund managers will want to position themselves and say we are now committed to India, Asia, emerging markets. That positioning is going to happen this quarter. I think domestic investors have missed this rally completely.
The test for a lot of people that it is actually a bull market is when you take the previous high out, or 20% away from that. Do you think we have a reasonable chance that in the next four-five months we’ll get there?
Damani: We will test with it, we will flirt it. I seriously doubt whether we will take it out because of the composition of the index. But all stocks may not make it back to their highs. I think there will be massive supply of paper coming into the market. There are significant changes going on into the tax code which could have implications in the market one year from now in terms of the new tax code coming in. So, I think those prevent us from saying that the market will significantly be higher than 21,000. But it is great, wonderful world if you trade in a range of 16,000-21,000 on the Sensex.
I am reiterating the basics: Get back to picking stocks, don’t try to decide the direction of the market as the undertone is buoyant.
Do you see a new high or a rangebound market but a lot of stock specific performance?
Jhunjhunwala: My personal opinion is that the new high is not easy. But if you look at selectively the auto index, it is already 20% higher, which is a life-time high. The fast moving consumer goods (FMCG) index is 10% higher, the healthcare index is on the verge of breaking it. Although I personally feel that breaking 6,100-6,200 on the Nifty and holding it is not going to be an easy task.
Jhunjhunwala: If we do very well, if you price in 2011-2012 index earnings, which you would do by December 2010, then it could. But for this run to go from 2,500 to 6,200 and make a new high, we are going to see such values on the Nifty and the Sensex which are beyond comprehension. I think it is a tall order. I agree with Damani. I say why 16,000. If the Nifty goes back to 4,200-4,400 and holds 4,400 to 5,800 for the next one year or next 15 months, long-term investors should be happy. But I feel that despite whatever the movement in the indices, which are difficult to predict, our hypothesis about India and about Indian markets has now got a solid foundation. The stress test is over. I think we have passed it with good colours. I see no reason why foreigners also will not pour money into the country.
On all counts, we don’t know what can happen in the next six-nine months or one year to the index. In the long-term, we are going to see the index at levels which sometimes we only dreamt of.
You have been also pointing out that many large-caps make you uncomfortable. Do you think that is the hurdle which the Nifty will have to deal with if it has to go to 6,200?
Arora: I agree with both of them. The new highs, if we reach, will not be sustained at least in the next five-six months. If all three of us agree that we will not get to new highs, then theory would say that it might. But I also don’t believe that it will happen and also that it should happen. I believe that next quarter, i.e., January quarter, you might actually have a correction, whatever minimum correction may happen—10-15% or less. But a correction will happen because this buying panic which will happen this quarter will suddenly make everybody tired. Everybody would be in the market and then maybe it will be some guys here or there who completely missed the boat. There will be some issues in Q1. You could relate it to the reduction in excise, these concessions that have been given, it could be inflation.
In the longer run, I don’t mean five years but even one year or nine months or 15 months, India has been firmly discovered and will definitely get serious amounts of money in the next few years. All we have to do is be presentable and not create new problems for ourselves.
You must be enjoying the ride in the rupee?
Arora: I am enjoying all the rides except that it is always more fun to have a serious amount of money before the rally happens. These days the rally is happening as sharp as the money is coming in. The big question is how will we give returns to the new guys. This is a bit of a tough situation. But in general it is a sweet spot for India. As Jhunjhunwala was saying, we have been firmly discovered and have come out with flying colours and generally with good credibility. So unless some major macro shock happens over the world, the trend of moving towards emerging markets, Asia and India—whether it is because you want to move away from (the) US or you want to diversify from dollar—is firmly in place for a long-time. But still you should have some corrections in between just because the pace is quite strong and you want new investors to feel that they are buying a relative bargain. So a little bit correction here and there is good.
Do you think the rupee is going to 42-43 per dollar?
Jhunjhunwala: I am not a rupee expert but I personally feel that in the longer term the dollar has to go down against the emerging markets. At the value of Rs42, Infosys’ margins are 31%. How are the Americans going to compete? What is going to happen to the current account deficit? Therefore, there is no question that the only way you can correct the imbalance in America is to let the currencies appreciate. I think the rupee is going to gain against the dollar. I cannot predict whether it will be 42-43 or 38-39, how soon, how fast etc.
What do you do now? Is your call that it is a bull market again and I need to be buying whenever I see value on every small dip?
Damani: Absolutely. You look actively for opportunities. The first set of results that has come in the two weeks of October in the small-cap and mid-cap space are breathtaking. Some of them are stunning results. The market is going to reprice small-cap and mid-cap stocks. They were all beaten down. Maybe the A group has run ahead of itself, but my eyes find it hard to believe the results posted by B group stocks.
But keeping in mind that the rupee is appreciating, the flip side of the play is to go long on gold. Diwali-to-Diwali, I am extraordinarily bullish on gold because it is broken into a lifetime high. It is at a 30-year high and it is at a lifetime high, which suggests that there is some basic buying going on there. The intellectual hypothesis is that the dollar is going to go down. So, the flip side is gold is going to go up. I would definitely suggest an exposure to gold.
Jhunjhunwala: Analysts have not been able to predict the gains of a restructured India. The kind of restructuring the kind of efforts corporate India has made, I think may surprise people on the upside.
A lot of American companies have come out with good results, top-lines are not going up, bottom lines are going up. In India, the top lines and bottom lines are also going up also because of the restructuring. So it could be far better than expected. As far as gold is concerned, I think this is the only asset class which has gone up for the last seven years and is now ready to go up for the eighth year.
You are bullish from here?
Jhunjhunwala: Yes, I am bullish on gold.
Last year, you did say that you were quite bullish on gold, are you that optimistic?
Jhunjhunwala: At that time, we were in a kind of financial crisis. Technically, what Damani has said is right. We were in a kind of financial crisis in January and nobody knew when it will end. I don’t think there is that kind of crisis this year. So what amount of money can we put in gold and where are you going to store and keep it. So it is better invested in equity.
Gold, it is not something that you tend to like very much?
Arora: I like it very much. I personally own a lot of gold and have owned it since 2004. I buy it every year. The only thing is Indian investors are buying gold in rupees which is not the same as buying it in dollars. I do not think it is now a safety trade. It is now a diversification, it is a currency. Suppose gold corrects $50 (around Rs2,315 today) per ounce do you think governments in China, Russia, Singapore and West Asia will forget about the dollar weakening and say now everything is stable. I think gold is going to become an alternative.
The fun part is exactly different from what Rakesh is saying. The fact is that you cannot buy billions of dollars of gold. All the smartest hedge funds have bought it. In India, it may not be so interesting because you are already going to be in a strong currency in that sense.
When will mid-caps really start firing?
Jhunjhunwala: You have to look at it with big lenses because a lot of activity goes on in the mid-cap stocks. There is always a history attached.
The debt level in mid-cap stocks is also very high. If the company is genuine and performance is right, I do not see any reason why they will not perform.
Do you think this is the kind of market where you pick the right stock and it goes up or is it still a market where 100-120 stocks are doing well?
Damani: Arora was talking about a buying panic. I do not know whether it will happen in the A group or the index. If you see the first few mid-cap results, and if it is an indication of what is to come, there would be a buying panic in small-cap and mid-cap stocks. I think you should by all means do bottom-up stock picking.
I spoke to you a few months back and at that time the market had not recovered this much. You said you are probably making your portfolio a bit narrower. Are you moving away from that?
Arora: I was giving up on larger-cap names for various reasons whether it was the Reliance group, telecom, or even IT (information technology). In that sense, there have definitely been more mid-cap buyers in the last four-five months in general. Over the next three months, I may either short some other stocks or index or reduce some of these mid-cap high beta names. But the number of stocks has gone up in the last three-four months definitely.
The revelation from the large-cap space has been autos. Has that been a revelation of the last one year if you have to pick something?
Damani: China has become the largest car market in the world, India is booming. I have heard that there is a two-week or 30-day waiting for cars in India. It’s a huge sector which has the potential to drive up the economy. The kind of value addition that gets created by an automobile sale in terms of steel, labour, advertising is huge. It is clearly showing that there is strong demand across consumer durables in India. This Diwali has been extraordinarily good from all the reports I have heard.
Jhunjhunwala: I did not expect the Nifty to break 3,800-4,000 on the downside. When we met for the election programme in Delhi, I had said the index will trade around 3,800-4,000. The rise above 4,000 has caught me by surprise. Having seen this rise, I can say the rise is not going to stop. There is no participation, stocks are going up perfectly, and are correcting. I don’t think that without a burst of a rise there can be any meaningful correction. Just as somebody said that there has to be panic buying and only then can be go into some meaningful correction.