Consolidation healthy for mkts: Rakesh Jhunjhunwala

It’s been an amazing three-four months for the market. Global markets are in the midst of a spellbinding run. Since the Budget, the markets have seen one big fall after which, the Nifty went on to achieve new highs

Rakesh Jhunjhunwala shares his perspective on what has happened over last four months and what the road looks like from here for the next three-four quarters and the next three-four years. He says that it would be healthy for the markets to consolidate at this range, which will prepare the ground for a dramatic rise.

He also thinks interest rates have peaked off and he doesn't see a further rise in rates.

Excerpts from an exclusive interview with Rakesh Jhunjhunwala:

Q: We will talk about the fundamentals, but you spent a lot of time watching the screen. What is the screen telling you for the moment?

A: Surely in the last two-three days, the market has exhibited weakness, but I am not sure that we are going to see a major movement, either way. Maybe in the next one-two months we are going to see range bound markets with some amount of consolidation rather than a major move, either way.

Q: How would you classify that - a major move? You are saying that more then a 10% Index move is unlikely over the next one-two months?

A: I would think so.

Q: Either way?

A: Either way.

Q: So essentially are we going through a consolidation phase?

A: I would think so.

Q: But are you a bit surprised that the Sensex has not gone on to make new highs or the Nifty did not stick at new highs for a very long time?

A: I am not surprised, because in the last four years, we have had a path-breaking rise from 3,000 to nearly 15,000. As a long-term investor, I would be happier if the market consolidates at this range and makes the ground for real dramatic rise. We have had fantastic returns over the last four years. As long as the market doesn’t lose much, I am not concerned at all.

Q: But you think this consolidation phase will be short-lived or could it be an extended one?

A: I think it could extend to six to nine months to a year and I would think that’s healthy for the market.

Q: But what are global markets telling you now, because almost every market has rallied so significantly?

A: Economic growth in Europe has surprised positively, there is a lot of positive news out of Japan, economies in Asia are doing well. Not only is economy doing well, but the percentage of profits that corporates are getting out of GDP, are at all time highs. Now the worry could be that these percentages may not be maintained, but the fact remains that today the percentage of corporate profit of GDPs is that it stays high. Interest rates worldwide are not at very high levels, but inflation is surely a matter of concern, which is why markets are doing what they are doing. But to my mind, the uniform increase in asset value of all classes is something that could be troubling.

Q: What troubles you the most about the extent of the breadth of the rallies that you have seen in commodities, bond, stocks, gold, oil, everything?

A: Sometimes I feel that too much wealth has been made very easily. But maybe out of prejudice, I have all my assets in Indian equity. I feel India equity, as an asset class, will standout.

Q: Do interest rates bother you, because that’s been the fear for the last few days globally that they might start inching up and denting the case for equities?

A: The markets are not discounting the fact that interest rates will inch up. There were expectations that interest rates in America will come down and in the last four-five days, after the economic news and Mr. Bernanke’s statement. The feeling now is that interest rates may not decline in America. As far as India goes, liquidity is abundant; inflation is below 5%, it's not expected to go above the 5% figure. You have seen some slowdown in the auto industry, so the monetary authorities can feel that they have achieved partly what they set out to do by easing interest rates. I see no reason why in India interest rate should not come down.

Q: Do you think they will go up before they come down?

A: I do not think so.

Q: It's completely peaked off you think?

A: I think so, absolutely.

Q: You do not think because of the ample liquidity right now the Reserve Bank may make another tightening move?

A: I do not think the government is necessarily interested in hurting growth. Government is interested that you have growth with controled inflation and I think, it's very difficult for inflation to go above 5% in the next five-six months. In India, we don't have more then 2% owned houses, we are at an initial stage of consumption; why should any government want to limit consumption?

I personally feel interest rates should come down and industry will be lobbying now that inflation is under control. If you do not have elevated inflation, next four-five weeks, we can expect some softening in the July policy.

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