Jhunjhunwala, Shankar Sharma differ on mkt direction

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.

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