The financial markets have suffered over the last four years with the mortgage crisis, the Lehman crisis, Greece, Europe and policy paralysis in India- almost an ad infinitum of crisis in the last four years.
In CNBC-TV18's special show Morningstar Investment Conference on Rakesh Jhunjhunwala of Rare Enterprises, Madhusudan Kela from Reliance Capital, Andrew Holland and Sanjoy Bhattacharya shed light on the last four years and perhaps the next four.
Below is the edited transcript of the interview with CNBC-TV18.
Q: You are the big bull. You are the first and the true believer in the Indian story. Where do we stand now?
Jhunjhunwala: My thinking has changed a little. Let me analyse the global situation as I see it. There is a lot of optimism about Europe and America that markets will make new highs. I am a little bearish on the Western world because I think the macroeconomic circumstances are not those in which new highs are made. There are challenges due to debt, demographics and Europe. Secondly, I believe that the infusion of QE2 is not going to make a difference and change circumstances in the Western world.
Third, I think that there is going to be a big fall in commodity prices. From the commodity bull market that started in 1997 or 1998, I think it is either the end of the bull market or we are going to go in for a very severe correction. So, I think these indicators are extremely bullish for India. Also, I think foreign buying is coming because we are the country that is going to benefit the most from the fall in commodity prices. So, a lot of funds hedged that if commodity prices fall, India will benefit.
And I also feel that whatever be the circumstances in India, there is faith in the Indian model. There is no imbalance. There is a balance of consumption and investment unlike in China. The data is much more trusted in India. I think India has one of the most aggressive monetary policies in the world. So if commodity prices were to fall and the interest rate cycle in India had to reverse, you will be surprised to know that of all the assets with significance in the world, India is one of the few assets in the world which has moved higher from when the QE2 was announced.
So, I have a feeling that if politically things don’t really crack up, with corporate India adjusting to the downturn and a sense of urgency on economic recovery, that there could be the genesis of a market which could go up for a long time.
I also believe that the mother-of-all bull markets is ahead of us. But whether this is the start of that bull market, I don’t know. But surely it could be the start of a market which could see a new high in the next 12-24 months.
Q: Are you contemplating the probability that a new bull market has begun in India?
Jhunjhunwala: I have never seen so much pessimism in the market as was witnessed in June-July. Household exposure to equity is lowest at this moment. Equity is a bad word, the first thing my mother asked me, “you don’t buy any land?” And a lot of people tell me, “What are you doing in the equity markets? You are down from what you were in 2007, five years have passed!”
This was extreme pessimism according to me. When the markets go up, mutual funds face redemptions. There is no participation and there is no faith in equity. Bull markets start when interest rates are highest and there is pessimism. The only thing that I am not so sure of is how fast earnings will go. I think 15-17 percent earnings growth in India is a granted according to me. I would rather look at 18-19 percent.
So, I think today India’s bull markets have never peaked off with out the PE going to 24-25 times earnings. Today, it is at 14-15 times. I still think that the mother of all bull markets is still ahead of us, just for the sheer underexposure to equity. So, I feel that a return of 15 percent and a dividend of 2 percent is a give. So that’s a 17-percent tax free return. I don’t know which asset in India is going to give me with the liquidity and simplicity with which I can invest in equity.
And I don’t have to time the markets. I think if I am a good investor it could go to 24 percent. For me 18-24 percent is a target and I think if you have the mother of bull markets it will go to 30 percent. Just as there is pessimism, there is also the optimism. So, I think the mother of bull market is still ahead of us.
But I am sure that this market is not going to give up without a fight and at this moment that is evident from the way the market is consolidating technically. There are so many scrips that have spent three years between Rs 30-35 for. Now those scrips are beating up on the upward.
Q: And have FMCG, cement, pharma all risen?
Jhunjhunwala: If you call me a big bull, this big bull is also approaching the market with suspicion for what could be a one-third chance. So, I am bullish in the short-term, medium-term and long-term. And I reserve the right to be wrong.
Q: Rakesh’s point is worrying me that Indians don’t invest in Indian equity. Mutual funds have faced redemptions, and if one goes through the shareholders list, one can draw a basic compass around South Bombay and those are the people who own equity. Aren’t these distributors doing their job or what do they need to do to sell Indian equities?
Kela: We have done our part and we have interacted with many of them and multiple number of times. Looking at the data from January 2009 till last month, there is a redemption of Rs 41,000 crore from mutual funds in India. Someone was saying that out of the financial savings, it is a negative contributor for the market rather than positive.
People made too much money in gold and property in the 2007 bull market. The new thing which we have heard from Rakesh is that his mother asked him why he is not buying land, so in a way that is corroborating the prevailing sentiment that everyone else is making money in property and gold, so people are getting trapped in their own success.
Essentially, if you ask someone where I should put money today, equity as Rakesh said is a bad word and it has not performed well. So, one can’t blame people for not putting in money in equity. Four years back, if I didn’t put money in equity and I put it in property or gold one would have made money.
Q: Has a new bull market been born?
Holland: I am not so sure. To try and argue against Rakesh is always difficult, but we are part of own problem here listening to what Madhu was saying as well. Last December, everyone was saying don’t touch equities, don’t do this, don’t do that, similarly in June, July and all of a sudden the market goes up and we are seeing a new bull market.
So, I am not so sure if we are in that bull market yet, there is lot of headwinds there. The markets will continue to grow at the same rate as earnings growth. So, I am looking at 10-15% for 2013-2014. So, one will see a 10-15% rise from here which would take you to new highs.
I am not saying we are not going to go to new highs, but is this the beginning of the bull market? I am not so sure that I will be jumping into high beta, high debt and questionable management companies at the moment. That time will come when liquidity is just too strong, but at the moment I would still stick to the good defensives, good cash flows and good quality managements. Those will be the ones which will make the money over the next year. As regards to the global environment, we are kind of writing off the US and Europe.
When I look at the US, despite all its problems over the years, it has this ability and knack to just reinvent itself. Who would have thought six months ago, may be three months ago with all jumping around and saying, you know what, Apple sales are going to add to 0.5% or nearly 1% to GDP of America and that’s how the US reinvents itself. There are problems in Europe, but they are doing exactly what US did, throwing money at it, keeping the tailwinds down until they can start to get growth back again.
Jhunjhunwala: So, you are saying that that you can go on giving Heroine in China and America and Europe can overcome their problems with 11% fiscal deficit in America, with this kind of a current account do you think macro conditions will allow a bull market in America?
Europe has more structural problems and biggest problem is the demographics, they can’t afford social welfare. So, I don’t know to whose mind and how in these macro conditions where most countries like Spain and Italy are being forced to accept conditions set by Germany you think a bull market can arise there and China can change the world?
Holland: China has changed the world and will continue to change the world. Once you get to the fact that in US the money is going to go back into equities from bonds, where one made huge returns over the last two years, interest rates there are so low they are forcing people into equities. So, you just see them moving to equities. I am not saying it’s going to be a huge shift, but if that shift happens there will be performance.
Jhunjhunwala: Don’t you think this easy money is continuing for last two and half years, ever since Bernanke came or the crisis. So, the shift of money to equity has happened. Don’t you think America can go the Japan way? Japan has kept interest rates low and the Nikkei has come down from 40,000 to 8,000.
Q: You might say anything about America, but they created Facebook, they created Instagram, they created Google all in the last five years.
Jhunjhunwala: I am not saying America is going to get finished. I am just talking about envisaging a bull market in America just because interest rates are low. In the last quarter, all large tech companies and all large industrials have underperformed, which is the best indicator of the slowing world. You see Caterpillar and Dupont, they are selling to the world, you look at Apple and Microsoft.
Holland: What Caterpillar said when they came out with their results was that they had a profit volume, but they said next year 2013 they expect growth to start picking up led by China.
Kela: While people are too obsessed about predicting where the markets and the index is going, there is a fascinating bull run going on in India, it is quiet. People who don’t own those stocks can continue to remain very skeptical about investing in equity. Many a times people make loose comments saying it is only restricted to 10 companies.
I can tell you that 50% of the market is in a bull market since last two years. It is FMCG, pharmaceutical, IT, cement and auto. At the peak of the bull market in 2008, our market cap was close to Rs 75-77 lakh crore and even yesterday it was Rs 61 lakh crore. So, there has been a fall of Rs 15-16 lakh crore from the peak, but institutional money, which was there in the market in 2008, has gone up by FIIs and mutual funds put together.
The investing universe of all these institutions has come down by atleast 50%. As a fund house, we are not even bothered to look at lots of those companies where we invested in 2007 and 2008. Forget investing.
If one just leaves aside this obsession about where is the index is going and where Nifty is going, there is a great bull market going on. I have never enjoyed investing as much as I have enjoyed in last two years. We just need to get the stock right and buy it at a sensible price. It is not restricted only to pharma or FMCG, we have made 100% return in financial stocks and real estate stocks in last two years. It’s a great bull market going.
Jhunjhunwala: In any market, even without a bull market there are great opportunities, but in a bull market the returns are multi-fold.
Q: We had 2003-2008, one of the great bull runs that you wrote about happened. In 2008-2012 took your pants off the market. What are the learnings? Give me the two-three things that you feel people should know about how to size up these markets?
Jhunjhunwala: The first learning I have had is to be greedy while buying, don’t be greedy while selling. I bought Prime Focus stock at Rs 4 and held about 10 percent in the company. Goldman Sachs offered me Rs 115 over a period of four years. I bought it for Rs 4 and Rs 115 is what Goldman Sachs offered, but I said no, I will take Rs 125.
I didn’t sell and the price came down to Rs 7. It is now at Rs 50. So, one lesson of the bull, especially, if you have large holding in mid-cap companies do sell, don’t get greedy.
The second biggest learning I had of that market is that value investing consists of two parts. First part is that when I study the business model of a company, predict the earnings and feel that there can be a constant or very good growth in earnings - I don’t know the present value, but because of the prediction of the constant growth in earnings, the future values that the market is predicting has a mismatch with the future value that I am predicting. So, that’s value investing.
But there is another kind of value investing as well. I feel there is value in some real estate stocks today. They have been beaten down to 10 percent of that value. But I won’t say that I can predict the earning for the next seven years. So, I can buy them and maybe hold it for a year and one and half year and sell it.
Q: Are the opportunities greater today than they were in the last 30 years, you have seen some fabulous bull markets, great rise and great fall.
Bhattacharya: The opportunities are tremendous because today share size creates opportunity. The fact that we are approaching a USD 2 trillion economy itself creates a huge range of opportunity. There are industries, which didn’t exist. 20 years ago, they are genuinely large industries now, for instance the business process outsourcing industry.
It has done fabulously. We are one of the biggest players in the world today and are likely to get larger going forward. So that creates opportunity. If you go to places like Gurgaon where the BPO industry is, look at young people who are employed in these companies and look at what prosperity it has brought them by working for these companies.
Even simple businesses like financial services as a business, how big was financial services distribution a 15 or 20 years ago and how big is financial services distribution today? It is huge and it is likely to get much bigger. So, you don’t have to invent something new. You don’t have to find something unique. Many of the existing businesses, which started off are going to get bigger and bigger. As they get bigger they are going to have opportunity.
You look at where America was in the 1970s in terms of people distributing financial products and look at where it is in 2010. Numbers of millionaires have been created, just as they have been created in India. In every single area you will find more and more opportunity. So, you don’t have to find absolutely brand new industries.
Q: You need to be optimistic about the future because opportunities multiply?
Bhattacharya: Yes and they are. In our country in that sense it is alive and ticking no question about it.