Jhunjhunwala, Shankar Sharma differ on mkt direction

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

: 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.