With never-seen-before range of falls being routine in the Indian markets and capitulation taking centre-stage, the question on everybody’s mind is: what next? What does one make of the madness and when does it stop? Samir Arora of Helios Capital; Rakesh Jhunjhunwala, Investor and Trader; and Shankar Sharma of First Global Services; three of the market’s well-known names, come together to answer.
Sharma is less optimistic of the picture and sees it closely linked to the global scenario. This time the financial situation is truly different, said Sharma, adding that pain is far from over. “The reason why I say that there is still downside is because I don’t see a revival of any of the factors that drove the last bull market any time in the next 12 months,” Sharma said.
“The reason why emerging markets did well was because the weak US dollar drove up commodity prices. That drove earnings in emerging markets in general, made a flight away from US dollars into non-US dollar assets. That tide has changed. The US dollar is back to being the safe haven, the reserve currency. That change is not going to reverse anytime soon,” Sharma added. “It’s not just about India or the BRIC countries. The larger problem for emerging markets is the strength of the US dollar.”
“A lot of leverage money came into a lot of asset classes. That leverage is gone. It is going, it is being pulled out. As it always happens, the asset class that did the best will be the one that gets hurt the most,” Sharma said, adding, “So, the whole legs from this bull market have been cut. Let’s make no mistake about it. We are not going to see the highs to this market for many years. The whole construct, the underpinnings of the market have to change. Newer players have to emerge; new sectors have to come up for that new next bull run to happen.”
Jhunjhunwala sees a three-phased way out of the current bear market. “First is going to be a phase of stabilisation and it will be linked in a large part not to local but international factors. Then we will go through a phase of consolidation. Then, we will go through a new market,” Jhunjhunwala said.
Arora — who like Jhunjhunwala has a more optimistic view of things — says the markets will rise whenever they stop falling and sees a resurgent India growth story happening soon after that. “If you see how the markets have been behaving in the last few months — it is as if they are supposed to go to zero, but ultimately, things don’t go to zero,” Arora said. “So, right now when we look for optimism, we are just saying that if markets were to stabilise, we would get an environment where the world evaluates what India and other relative strengths of the world are. India is very well poised for it.”
“The point is that we have fallen so sharply that even getting back a month ago would be a very significant appreciation in the market. That will start very soon one day because it cannot fall at the pace at which it has been falling,” Arora added.
Over a one-year period, Sharma says a retail investor should go for a 10.5-11% return on Fixed Deposits than for equities. “[Because] this is not going to be a buy-and-hold market. It is going to change its colours, its strips and become a trading market. Timed right [in the market], he (the buyer) is definitely going to beat the returns of 10.5% or 11% of the FDs. Timed wrong, he is going to lose everything.”
Arora, though, disagrees: “If you put in the investment average over the next three months starting tomorrow rather than one month later, then yes, you will do better than fixed income,” he said.
Summing up, Jhunjhunwala, on the possible reasons for things to improve, said there were two positives: Interest rates going down on the back of falling inflation; and India’s improving monetary, fiscal and foreign-exchange position thanks to the fall in crude prices.
Here is a verbatim transcript of their interview on CNBC-TV18’s show Samvat 2065 anchored by Udayan Mukherjee. Also watch the accompanying videos.
Q: You have been the most circumspect. Do you think most of the damage is done or is there more to come?
Sharma: All I can say is: this time, it (the financial situation) is truly different. So, even as it is a cliché, this is just something completely out of the realms of possibilities.
Q: Have you seen anything like this in your life?
Sharma: No, never. And I hope I don’t see too much of this anymore. But that said, beginning of the year it did look like the bull market was drawing to a close. One had reasonably optimistic price targets in hindsight. My sense is that one is not done with this thing either here or globally. We will have rallies of the kind that we have seen intermediately over the last three or four months’ time although even a brief rally these days is very illusive.
The reason why I say that the pain is still not over and there is still downside is because I don’t see a revival of any of the factors that drove the last bull market any time in the next 12 months. It could be even longer — of course during the programme, I am sure each one of us will elaborate on those — and the chief problem that exists this time is the rise of the US dollar. That, at the very heart of it, is the reason why emerging markets will probably not come back as an asset class for quite a while to come. The reason why emerging markets did well was because the weak US dollar drove up commodity prices. That drove earnings in emerging markets in general, made a flight away from US dollars into non-US dollar assets. That tide has changed. The US dollar is back to being the safe haven, the reserve currency. That change is not going to reverse anytime soon. So one will see the euro weaken against the dollar. All emerging market currencies are very weak against the dollar. That’s the central problem. It’s not just about India or the BRIC countries. The larger problem for emerging markets is the strength of the US dollar.
Q: What do you think? How close are we to a bottom and even if you cannot answer that, do you think most of the pain in terms of price is done?
Jhunjhunwala: There was a Kaka (uncle) in the stock market in 1992. I told him: I am worried [at the way] the stocks are priced. They are not justified by the fundamentals. So he said: abhi sab funda ka mental hai. So let us not talk fundamentals. All values are an expression of opinion and all opinions are influenced by emotion and news, both on the downside and the upside. Just like at 21,000-22,000 levels, we felt it will never end. You had an occasion where Mr. (Mukesh) Ambani sold 5% of Reliance Petroleum shares. The Economic Times reported it, and even at that price, people were buying Reliance Petroleum at higher prices.
What's going to happen in the markets here is that we are going to go through three phases.
First is going to be a phase of stabilisation and it will be linked in a large part not to local but international factors. Then we will go through a phase of consolidation. Then, we will go through a new market. Also, I don’t understand how the dollar is defying gravity. The only way for housing to ease in America is to consumption to ease up. The only way the American economy can stabilise is by growing exports and with this value of the dollar, what will happen to American exports?
America also requires 6-7% current deficiency. Who is going to finance it and for what reason? How long will my driver say: put that money in a bank and the Indian government will invest in the US treasury for that person in America. So the dollar has to reverse, it is only a matter of time. As far as Indian fundamentals are concerned, I don’t know how worse or better they can get but to my judgment, we are best suited to face whatever problems arise, amongst the countries in the world.
I cannot make sense of the fact that five months ago, I was told a story on Bloomberg that it was confirmed that a Korean development bank is buying Lehman Brothers. Today, people are selling in Korea because the Korean banks have got USD 100 billion of debt that is coming up for renewal over the next 12 months guaranteed by the Korean government, which will not be renewed.
Therefore, these are phases in markets when you cannot talk sense. You just have to look at prices and the technical factors. You’ve got to look where world markets will stabilise.
What I can say is today the market went to a point because it gained 5% and it held. It gained another 5% on that. So, I think unless there are two or three days of successive gains in international markets, we are not going to stabilise.
Q: What is your take? I am sure events of the last couple of months would have come as a bit unexpected at least in terms of the price erosion. Do you think most of it is done?
Arora: Yes. [It is] totally surprising, [whatever happened in] the last few months. But my theory has been what Rakesh just said: this market will rise when it stops falling. I disagree a little bit with what Shankar’s point when he said it is an all-or-none situation. Even I agree that there is no logic for the US dollar to keep strengthening over time. But even if it did, the world does not come to an end.
If you see how the markets have been behaving in the last few months — it is as if they are supposed to go to zero, because there is a recession next month, next year or this year. Ultimately, things don’t go to zero. As of now, the markets would celebrate. As I said last time, just the reduction in volatility and just the fact that the markets don’t fall would be enough. So, right now when we look for optimism, we are just saying that if markets were to stabilise, we would get an environment where the world evaluates what India and other relative strengths of the world are. India is very well poised for it.
So, as of now we don’t have to revisit what the reasons for the previous bull run were, because it was something which made stocks go up five times. If, today, you tell an investor that you would just go back to September 30 market, which is effectively a 65% rally because the market has fallen about 40% this month — even if you say it could happen in three years — you could get all the money in the world.
So the point is: it just has to stop falling. Then I think there will be one sharp reversal and things would stabilise, but it may take long. But as fund managers, as current investors, nobody would mind that and that would be the seeds for a new run. You may not call it a bull run. But even if today, as Shankar said, you cannot read the last Bull Run for five years, it would be humongous returns from today.
So, the point is that we have fallen so sharply that even getting back a month ago would be a very significant appreciation in the market. That will start very soon one day because it cannot fall at the pace at which it has been falling.
Q: Before that process starts, do you expect more price erosion, even from 8,000 on the Sensex?
Sharma: Frankly speaking, that is no call to make because from 8,000 we could rally 10,000 conceivably and those could be very quick, very sharp, could be over in 10 days’ time. Those kinds of things will happen. If you are smart enough to play that, you will play that.
My sense is, looking at individual stocks, looking at the baskets of various stocks; I don’t see how telecom will ever come back to even 30% close to its highs. I don’t see how real estate will ever even double from these levels. I don’t see how infrastructure stocks like Jaiprakash Industries are even going to make their way back to Rs 150. I don’t see how Reliance Industries is going to go to Rs 3,200. I don’t see so many stocks based on a variety of factors, ever trading anywhere close to their highs.
So, therefore the probability of them even rallying 30% and sustaining is very slim because I am sure that view is generally just not my view. I don’t think a lot of people will disagree when I say that a Jaiprakash Industries, or a DLF, may or may not ever get back to even 100% higher prices. It means that the wave of selling might abate for a day or two, but will come back in all fury the moment you see some kind of uptick on prices. That will keep capping your gains. Whether we like it or not, that is really the way this market is. A lot of leverage money came into a lot of asset classes. That leverage is gone. It is going, it is being pulled out.
As it always happens, the asset class that did the best will be the one that gets hurt the most. So, in India, capital goods and banks did the best — you have seen how they have done lately in the last eight-nine months. Overall on a global basis, the BRIC countries did the best. You see exactly what has happened. US was the laggard market for the five years of the Bull Run, it has actually been a terrific outperformer, down only 33%. India is down about 65%, and most other BRIC countries are down about the same.
So, you can imagine that just being long US and short EMs (emerging markets), you made a 30% relative return. So, the whole legs from this bull market have been cut. Let’s make no mistake about it. We are not going to see the highs to this market for many years. The whole construct, the underpinnings of the market have to change. Newer players have to emerge; new sectors have to come up for that new next bull run to happen.
So, right now I’d be very happy with a 10% rally in the markets. Beyond that, I don’t think anything sustains.
Q: How long will it take in your eyes? You spoke about stabilisation and then consolidation – what are you resign to?
Jhunjhunwala: I want to make two observations. Markets in the world are facing an uncertainty they have not faced in the last couple of years. Markets don’t like uncertainty. We cannot keep, however, keep on extrapolating what's happened in the last 12 months into the next three years.
There is uncertainty worldwide about de-leverages but what gives me hope is that at these levels, we are pricing in at the worst. It all started from the housing market in America. The fact remains that August sales of existing homes have gone up 7%. September has gone up by 5%. New home stats in America have come down to 4.5 lakh. So I don’t see a total economic collapse in the world — a possibility to which I give a chance but a very slim one. We are pricing in some kind of global economic collapse and even if the growth worldwide next year is 2-2.5%, there is no degrowth. Markets will go up next year. Now I don’t know how the US dollar is strong in momentum and on the charts the US dollar. If it continues to remain strong, then God help us.
Q: How long will all this take? You have seen previous bear markets. Do you think this one will test us for a year or two even from here?
Arora: What I have always said is: it depends on how you define a bear market. Coming out of this, a 10% move in the next one year would not be a bear market in anybody’s mind because [there would only be] relief of tension from what is happening these days. Before that, the point is then you are buying stocks in the market; somebody is always selling them and you do not know why they are selling. Mostly they sell for information or because they have a view and sometimes they sell because they need liquidity. There is no other reason why somebody sells a stock.
Of course, you may say that today the amount of selling is too large and therefore I will wait for a month, to which I agree. So it has to be based on timing. I would say: if we all just define a 90-days-later view and go and buy this market independent of what the level is because this kind of de-leveraging if it has to happen; it has to happen over weeks and months. It cannot happen over quarters and years. That would be a good starting point.
But I do not like the idea of — of course you (points to the anchor) being the leader of this, when in a crowded theatre, [you are] shouting fire-fire even though you notice a fire at one end. But the fact is shouting fire, when it is not really needed, creates more death and stampede as we now know in India. So the point is everybody knows there is a problem but to think it is the end of the world, I do not think it is.
Q: But it is better that I cry fire rather than say good things like you did three months back and let people get into stocks and then burnt their houses, right?
Arora: That is true but the point is: to bring up every reason now is not really needed. Also the world does not get a free ride. We cannot have a free ride in this world that we will wait but we are all looking for confidence in the world so it is collective. Everybody is a participant in this market. We should not act as observers of this market. It is just that some people think for a few days that they are mere observers.
Q: I am not a participant in the market. My job is not to say good things when things are not good. I say it like it is.
Jhunjhunwala: We all say things as we perceive them and we have the right to do that.
Q: What is your observation on how long this 8,000-10,000 kind of range can last?
Sharma: This range has been the moving target. I think it was 3,800 to 4,200 on the Nifty then 3,600 to 3,800 and now it is like 2,500 to 2,800 and I am no big lover of trading ranges. The fact is that the whole construct of this bull market is gone. My sense is that the S&P 500 will reach 600, which I think is a 20-25% away or thereabouts. The Dow will easily breach where it was in October 2002. Within that context, India still does very well because India still is up about 2.5 times or 3 times on the index from where it started the bull run and average stock is still up substantially. I look at a stock like Unitech adjust over where everything was 0.60 paisa and now it is Rs 30-40. That is not bad returns in many standards.
There is still a lot of money on the table to be taken off — for investors on a number of stocks and that’s a real problem. The outperformer gives you so much returns that people can still sell in reasonable size and still lock in gains which relative to let us say US equities market still look very good. The average stock is up at least four-fove-six times on the good quality end in India. I mean a Bharti used to be a Rs-45 stock, it is now at Rs 550. That’s still serious gains for anybody.
So what I am saying is till that whole original bull market construct is completely taken out of the equation, I don’t think the new bull market starts. But within that, Samir is right — we could get a 10-20% rally. I don’t think that amounts to anything at in context of how much price damage and psychological damage this market has suffered. I don’t think we are out of the tunnel yet. We are barely, I reckon, 40-50% into the turn.
Jhunjhunwala: I cannot agree on that.
Q: Do you have the conviction to go out and buy today at 8,000?
Jhunjhunwala: I have bought today.
Q: What kind of sectors were you buying?
Jhunjhunwala: I can’t say what I bought. But I can tell you one thing. One cannot look at the S&P and Sensex in isolation. That from 2002, even in the base estimate that you gave me, the Sensex earnings are up 3.35 times. I don’t think the S&P earnings are up 3.25 from 2002.
They won’t even have doubled. So one cannot compare the S&P to the Sensex. You are comparing apple with peaches. Here the earnings have gone up 3.25 times, there the earnings have doubled.
Sharma: That is completely incorrect. It is the same global bull market pond that every market drinks from. Nobody stands out. The only way you can say it is an Indian bull market is when every market is down and India goes up 50%. Then I will agree with you. Otherwise it is a big global macro move.
Jhunjhunwala: Ultimately, whatever I have learnt in the markets is that markets are slaver for earnings. One is going to find stocks at one time earnings and one is not going to have consolidation, one is not going to have people who take takeovers. Because when I buy stocks, I am buying value, I am buying assets. So if you tell me one thing, if that history is going to change for prolonged periods of 10-15-years, stocks are not going to be slaver for earnings but are just going to be valued just on any basis because somebody has the need to sell and somebody is leveraged. History tells us, at some value, if somebody is leveraged, there emerges a buyer. So I cannot agree with you that one is going to have values just because Bharti has gone from Rs 50 to 550, which means that Bharti must come down. I don’t agree with that.
Sharma: That’s not my point. I am saying that for an investor who bought, he has still got enough gains.
Jhunjhunwala: So it must come down?
Sharma: Exactly because those are the places where you made the money. That’s the place where you are going to take the money off the table. That’s the way people react. They say okay this is still money in it.
Jhunjhunwala: I can get you the tape I heard you say — and I quoted you — that assets by equity by an asset class is one which trend upwards.
Sharma: Absolutely. But it doesn’t trend upwards every single day. US equities underperformed for 14 years, they didn’t go anywhere. India didn’t go anywhere for 10 years. We had a good run along with the rest of the world.
Jhunjhunwala: Indian economy is not in mid-ages, the Indian economy is just in its puberty. We are just into our teens.
Sharma: It doesn’t matter. What matters is that whether the environment is conducive to a global bull market or not. It is currently not. It was great during the last five years.
Jhunjhunwala: Let’s agree to disagree. Time will bear it out.
Q: Let me get a third party in then, since the two of you disagree. You were talking about de-leveraging etc, what's your sense…
Arora: I was saying that Shankar is criticising you much more than I did because he is basically saying that you are not needed. We should only watch CNBC-US because everything depends on the S&P. Everything is a global bull run and we should just be a multiple of S&P.
Sharma: That is the fact. You show me the data that disproves that, instead of giving opinions. Give me the data that tells me my bull market stands away from the global bull market.
Jhunjhunwala: I will give the data. There is a big parallel. In 1965, the Dow was 1,000 and the Nikkei was 4,000 in the same year. In 1989, the Dow was 2,000 and Nikkei reached 40,000. There are so many parallels.
Sharma: Let us talk about an economy like India which has just converged with the global economy. During the last 10 years, I don’t know of any six-month period in which India performed very differently from how the world was performing. That’s the reality, we have to admit it.
Q: What’s going on with the FII selling? When do you think that nears some kind of completion? What sense do you have sitting out there?
Arora: As of now we hear a lot about hedge funds selling which may be true but the only thing — which I said last time too — is that hedge funds normally get a much longer period. At least a two- or three-month period before everybody would get to sell. Therefore this kind of selling, I think, has to do with India-oriented country funds where the redemption periods are: you have one-day notice and need to pay within three days. Hedge fund may also sell because those guys are selling but I don’t think the driver of this kind of a fall would be hedge funds because normally it’s not that they have to sell within three-six days. Even we were much liquid in terms of our hedge funds; liquidity terms are redemption terms. We will have at least 45 days to sell at any point of time before an old redemption has to be paid out.
But in general I cannot say that this is FII selling independent of the fact that the world is selling. Therefore this argument that strategists are making about Indian rupee depreciating and India having some problem on the fiscal account — I do not think that is a real reason.
Right now, it is a dollar-driven reason because even against gold which would have the best fundamental in some sense the dollar has appreciated a lot. So we should not take everything on ourselves. Our problem is: as Indians, we tend to get a bit holier-than-thou. We have strategies to come on your channel and say, how India is overvalued against the world by 40% without differentiating that we did not close our market on any random day or just did not choose to bring some government in and say buy stocks or randomly lockup some CEOs of companies or fund managers and give them visas. If the world is not going to appreciate these differences, maybe we should also all do these things and close our markets for five days when the world doesn’t want to penalise such action.
My point is: the world is not an all-or-none. If you bought today and market fell 20% tomorrow, if you are buying only 1/10th of 1/5th of what you are supposes to buy in this period, it does not matter.
The point is that even everybody is a hedge fund manager. Nobody should think that he is an all-or-none guy. The point I a, saying before is it is in our collective benefit to give some benefit to what is happening around us and not to think that we will all wait but somebody else will buy and then we will buy. Everybody is a participant, every consumer is a participant, every channel viewer and newsreader is a participant. Because in the end, everybody will be influenced and affected by it.
Jhunjhunwala: I would like to add one point to what Samir said. From 14,000 to 21,000, I do not think there was a single day when the FII buying was negative. I think from 4,150-4,200 to 5,700 — to the day they banned the P-Notes, up till that day — everyday continuously bought and the story was you cannot leave India, every FII has to be in India.
So, with due respects to them, I don’t know what to make of their wisdom. What was the reason for them to buy at 21,000? What was the reason for them to sell at these levels? What are the factors that drive them? What I do know is that the factors that drive them ultimately reverse them. It had happened earlier; it happened at 21,000, it happened last year, it will happen this year. The value of (their) holdings is now estimated at about USD 60 billion. So if you see the total world market, where their assets are between USD 5 and 15 trillion, India is a small part of it.
Arora: We cannot talk about Shankar because he has been right most of this year and I totally appreciate that. But look at other people who come on your channel and look at what they have been saying about oil, (they said) oil was in shortage and it was going out of supply that there was one last Saudi Arabian field [remaining] in the world. With great conviction, everybody would come in and say the same things. Three months later, they come now and say [prices of] commodities are going down. Point is: you cannot be carried away totally by the moment and therefore obviously everybody has become cautious. We have not net 30 instead of 50-60 but the point is that you cannot walk away from this game. If you are in this — and that includes everybody who is watching your channel — they may portion 1/20th or 1/10th but to think that we will wait and everybody else will support us and buy us out is not going to happen.
Jhunjhunwala: Can I look at earnings in isolation of ROC (Return on Capital) and ROEs (Return on Equity); earnings are not a mathematical figure.
Q: You are going on a different tangent.
Jhunjhunwala: No. India is cheap and when I compare India and Korea. If the return on capital in Japan is 3%, return on capital in India is 20% I can’t equalise PEs there from here. Today, if our long bond is 8% and we had 10 times the current year’s earning; the index is getting better yield in the long run.
Q: What if earnings fall 25% next year?
Jhunjhunwala: That’s the uncertainty. Who knows whether they will. Nobody can say that with certainty. That’s why I am saying you are pricing out. If the global economies collapse, they could.
Q: Do you think they will?
Jhunjhunwala: I am positively optimistic, they will not.
Q: In no de-growth at all next year?
Jhunjhunwala: Not 25%
Arora: We say that stocks represent present value of future dividends and future earnings and then we look at one-year earnings in a very distressed environment. Even if it is down 10% and therefore price everything of that that what happens when earnings are down. Beyond a point, people say that earnings have not yet been reduced but the market has fallen 65%. So you mean to say all this happened without the market taking a view on earnings? It is all simultaneously happening.
There are many times in the world when bad news takes a stock up because that it the way it works. Now what Shankar was saying that the dollar because it will strengthen therefore the rest of the world will be bad, well then you could kiss goodbye to (Pepsi CEO) Indra Nooyi being the most powerful woman. She became powerful because she was running a multinational where she made all the money from a weak dollar. In the end, these are all self-correcting mechanisms. You will never have all or none.
All over, the world will not choose to have it like that. In the end, the world will not be confident enough to bet on only one factor even if it is the factor that happens but right now because there is a process of redemptions or whatever is that new word — de-leveraging — so it may take its course. Therefore you wait 20-30 days independent of what the price is and then by that time either it is the end of the world or this process would have taken us to zero or the de-leveraging would be over.
There may still be an overhang because in future people may not take the same amount of leverage but that is as if we want last year’s returns. You have to have returns in the environment in which you operate. Right now, for the next three months, if somebody told me the market will not fall and will not go up and will be effectively closed down, I will be the happiest guy in the world.
Sharma: My point is straightforward. In a lot of cases, what was the market cap of companies six-seven years back is equal to their interest outflows now. A lot of these companies are based on commodities and cyclicals. I consider infrastructure to also be a cyclical because it thrives in eras of cheap capital and cheap money which is what we saw in the last five-years. Jaiprakash Industries’ market cap was lower than the interest it pays now.
Q: Why do you single that stock out for punishment like it won’t go up?
Sharma: You should be asking Samir that.
Q: Samir sold out of it long back I am sure. Samir, didn’t you?
Arora: Yes, long back.
Sharma: He is the original finder of the downswing. But my point is that a lot of companies have built up huge balance sheet risks in India. We did exactly the same thing in the ’90s by putting up capex. This time we have done capex or acquisition which is the same thing as capex.
That is my real fear that you have so many good blue-chip names who have gone out, bid for companies at crazy prices. That is all setting on the balance sheets. So I do not really pay too much attention to these earnings estimates of the Sensex. That is an absurdity, which should be banned outright.
You are drawing an Rs-850 EPS across the bank, auto company, infrastructure company, steel company, two-wheeler company saying 850 times ten should be 8,500, ten times P/E across all industry including Hindustan Unilever, Infosys Technologies, Ranbaxy — that is complete absurdity.
Jhunjhunwala: So finally earnings will matter.
Sharma: Of course they matter. But they matter on a disaggregated and sectoral basis not drawing a line through all kinds of businesses and putting a common P/E to everything.
Coming back to the point, it is that companies have built a very significant risk on their balance sheet and no matter how emotional Rakesh Jhunjhunwala and Samir Arora get about the bull market — and Samir is so right that we are not neutral observers, I am not a neutral observer, I am a participant and I benefit from bull market as much as Samir or Rakesh do, let’s make that caveat clear.
But that said, you cannot ignore the hard facts that our companies today have greater balance sheet risks and in a lot of cases they have built these risks at pretty high levels of financing. Done at a time with a dollar-rupee was…
Jhunjhunwala: (Interrupts) From the 30 companies on the Sensex, I do not think more than five companies carry disproportionate debt-equity ratio.
Sharma: Correct. And they have been the companies that have actually done very well in terms of earnings. The companies that did not do well in terms of earnings have not done anything at all.
Jhunjhunwala: Infosys has done well in full cash.
Q: What names do you have in mind when you say disproportionately large?
Sharma: Some of the steel and auto companies and they have gone and done transactions which did seem very risky.
Q: Tata Steel, Suzlon?
Jhunjhunwala: That is what I am saying. Tata Steel, Tata Motors, some of the real estate companies, Hindalco, maybe even Suzlon. I do not remember more than five companies out of the 30-share Sensex and I cannot say that all the technology companies are in cash.
I do not think Reliance Industries has got any problem with liquidity, I do not think infrastructure has got any problem, any of Reliance Group companies.
Sharma: Infrastructure companies have got a lot of liquidity problems.
Jhunjhunwala: There will be certain companies but I cannot generalise that the debt-equity ratio within companies may be at all-time lows.
Sharma: Therefore the fact of the matter is that when you have gone and built up capacities, [increased] infrastructure spending, you have done without caring too much about what price and return that you are going to make on them. That in the downswing will get you hurt.
You do need to spend time marking time in this market. You cannot build a case for the resumption even if the earnings are not falling 25% in FY10, although to be honest, I do not believe that they will rise 10% in FY10. Looking at the history, last many years have had negative earnings growth. My sense is that you are still a long way away from calling the bottom to this market at least in terms of earnings momentum. Till that comes back, I agree with Rakesh Jhunjhunwala that you need earnings momentum to come back for the market to revive but I do not think that comes back that easily and that soon.
Jhunjhunwala: Warren Buffet wrote in his letter — I do not know he is right in saying it — that whether we should buy stocks or not but markets bottom far before the economy bottoms. That has been the history. I do not if everything in history is going to be turned around this time.
Q: But have they bottomed even before economies have started falling which is the case perhaps now? Only single market in the West has gone into recession, the others are still not entered into this?
Jhunjhunwala: Today, you are pricing in the recession. There could be a period of three to six months where the economies may not bottom out or maybe nine to 18 months. But whatever valuations you have today is because you are pricing in the future.
Nobody knows to what extent you will go around. But to say that Bharti is at Rs 550 so there is a long way to go down or because the stocks are not going to respond to earnings — I can say that in the index of 4,200 in 1992 — I think Hindustan Unilever was Rs 200. When the markets made a bottom, Hindustan Unlever was Rs 3,290.
So it is not that stocks will not gain. I think that corporate India is highly over-debted. There are certain companies but they do not represent the general companies. They have been punished and punished severely.
Hindalco today has a market cap which is less than what it raised in the right issue.
Arora: If the market is not pricing in the fall in economy and growth rates and explain independent of this leveraging world only, why have our markets fallen 45% this month? It is obvious that there are things being discounted. They may get over-discounted or not enough but to say now I will see some GDP number and therefore that will be another round of 30-40% because that is what happens when recession turns up in UK or somewhere else, I think we are doing it simultaneously.
At the end of the day, the alternatives have also to be seen: what else is the world — not in India but in the world — going into. Everybody is not going to keep their money in their bank because which bank they will put it in? If they actually put money in their bank in dollars, that means the banking problem is over.
So at the end of the day, it is all a choice between various markets.
Sharma: Which is why HSBC ran out of account opening forms in London.
Arora: State Bank of India also ran out of forms, these will happen for a few days or weeks. Whatever you may say, if there is a 20-year pension issue, that fellow will not — to save his job — say I am putting money in the bank and on a day one therefore, immediately take a hit in what he will accrue. They will still take all those bets. That is how life works.
So after it settles, the point is which market, which country has better opportunities or has fallen the same as other markets without having exactly the same problems. If India had in this fall fallen less then you could have said that India is already getting rewarded for it. Now a market that closes down, and a market which is open and a market which has restrictions — L&T (Larsen & Toubro) disappointed the market and disappointed us too but had a 32% earnings growth. Show me another stock in Russia or Asia where somebody went up 32% and then you say whether it is discounted or not.
The fact that that we have 40-50-20% earnings growth, half the world does not have. People talk about price-to-book, please show the book in the US banks.
Q: Fair point but it is still sad that L&T is at Rs 700 and languishing.
Arora: I agree. I am saying therefore when everything stabilises, the world will choose those markets, those countries, those companies where independent of the problem — there was this extra thing that the companies are performing well but they got hit as much as everybody else. Therefore after a month or two, when the whole world is fallen the same percent — nowadays everyone falls the same, plus or minus here and there but does everybody — everybody will put it together and choose what they like and in that case India has a very good chance.
Jhunjhunwala: Gold has fallen 35%. USD 1,035 per ounce was the top. Yesterday, I saw gold has gone to USD USD 680 per ounce.
Arora: Whether it is Russia, Korea, Taiwan, it cannot be that the world will suddenly say: no, I am going to keep my money in HSBC because that cannot be the trade of the whole world.
Q: Let us talk about the guy in India. He might not have such an international perspective. Has it come to the point where people can say at 8,000 Sensex if I put in money, I will get reasonably high chances of getting more than FD returns over a one-year period? Can you take that call today?
Sharma: The market has gone from being a buy-and-hold market to being a trading market. That’s the characteristic of bear markets that you do get very sharp — in fact one can probably and I still do believe that there is one big rally in this market that will going surprise us — which will make it look almost as if we are back into the bull market territory.
Q: 15,000-16,000 kind of rally?
Sharma: To be honest, my initial target was that from 10,000, it would rally to 15,000. In hindsight, it was too optimistic. Now it could well do down to 6,000 or 7,000 and rally from there to 12,500 which is where we were last month or may be the beginning of this month. So there is one big rally in there. This is not going to be a buy-and-hold market. This is going to change its colours, its strips and become a trading market. Timed right, he (the buyer) is definitely going to beat the returns of 10.5% or 11% of the FDs. Timed wrong, he is going to lose everything. My sense is that FDs and FMPs are in problems of their own. But good solid FD at 10.5% looks really attractive and if you lock it in right now because obviously the cycle is turning, I think one is good shape. I am just talking from a pure retail investor’s perspective, not a professional investor who can be a fleeter foot.
Q: Same question to you Samir. You have always spoken about asset allocation. It has not worked this year for equities. Do you think from a one-year perspective you can take that call and be right from these beaten down levels?
Arora: If you put in the investment average over the next three months starting tomorrow than one month later, then yes, you will do better than fixed income.
Q: Why do you keep saying those 30-days, 60-days, 90-days? Is it because you believe there is more to come?
Arora: As I told you my view is that in terms of timing — because the pace of the momentum is strong — either it blows itself out and everything is over and India goes to 1,500 or 2,000 or this de-leveraging-led redemption of forced selling. The pace is such that it can go on for five days, who is to say? But it cannot go on for 90-days. That’s what I am trying to say. That it will either end because you fall so much or the pressures would be off because the end-investors would say there is no point in selling at this point and may give you not a one-year window but may give you a few months window saying: okay I will redeem after six to nine months. Then you have that.
The point is that right now the selling is not happening, normally most cases because the fund manager has a very negative view on Reliance knowing that one week ago, Mr. Ambani bought it at USD 3.6 billion or because Warren Buffet says — and I don’t agree but because that poor guy has a redemption. So once you let that go off for a minute either because the market has gone down a lot or his desire to raise money is over, you will have that rebound which Shankar talks, after which again there will be frustrated sellers, pent-up selling demand and that may make the market trade sideways or plus-minus a little bit. But that first round we are not sure when it ends.
Jhunjhunwala: What I personally feel is I cannot say whether he should put it now but two factors which should dramatically improve the atmosphere for Indian equity are: one is interest rates are headed nowhere but down. In my calculation — and I have studied the WPI index — one is going to have between 5.5-6% inflation by March and interest is one of the biggest factor in valuing assets.
So when interest is going to go down, that will give a kick to equities. Secondly, one year ago, nobody was bothered about India’s monetary and fiscal position and the only joker in the pack was oil. With oil being down and I am not seeing any recovery for oil, India’s monetary and fiscal position and foreign-exchange position next year will dramatically improve. These are two factors which could drive up valuations in India.
We are pricing in some of the corrections in earnings already into next year. I am personally bullish on the ability of the Indian economy to grow. Indian economy is in its teens. Having said that, I must warn I have been wrong about the last leg of the markets. So please take whatever I say with a pinch of salt. But I wouldn’t say that for the next one year, but if one has two- to three-year horizon, I am quite confident with interest rates coming down, India’s macro position improving equity is going to give a much higher return.
