Samvat 2067: Experts see at least 20% upside over 1 year

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Samvat 2067: Experts see at least 20% upside over 1 year

CNBC-TV18's managing editor Udayan Mukherjee sat down with market bigwigs to gauge the road ahead for the markets.

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It's been a good Diwali this time around. Last year to this year-Diwali-to-Diwali-we are up nearly 20% for the Nifty 18% odd while gold is up 20% and real estate prices are up, so as an investor, one couldn't have asked for much more. Of course, there was some degree of turbulence during the year but nothing too much if you had been in the market and had seen 2008 and 2009. All in all, it's been a very kind Diwali.

CNBC-TV18's managing editor Udayan Mukherjee sat down with market bigwigs, Manish Chokhani, director of Enam Securities, Ramesh Damani, member of BSE, Madhu Kela, chief investment strategist at Reliance Mutual Fund and N Jayakumar, president of Prime Securities to gauge the road ahead for the markets.

Commenting on the road ahead, a very bullish Kela said, the market right now is looking in great shape for many Diwalis to come. "The kind of interest, which we have seen and the kind of fundamental recovery, which we have seen and the ground, I am sure we will be higher from here in years to come," he stated.

According to Chokhani, if earnings are expected to grow another 20% in the next year then there is no reason for the Indian market to de-rate. "On a Diwali-to-Diwali perspective it's a good bet to take that, you should be 20% up," he believed.

However, though Jayakumar acknowledged Kela's opinion, he said one needs to err on the side of caution ahead. "We need to be a little careful as it will not just necessary be an index play through the year. It may be a lot more to do with stock specific action," he explained.

Below is a verbatim transcript of the interview. Also watch the video.

Udayan: What do you think are we okay for next Diwali?

Kela: We are okay for many Diwalis to come. As we have discussed in the past that India story is getting its due recognition from international investors as you see in the flows in the kind of interest, which is there in India. I am really optimistic that the kind of flows, which we have seen, the kind of interest which we have seen and the kind of fundamental recovery which we have seen and the ground, I am sure we will be higher from here in years to come.

Udayan: What do you think-liquidity will be benign for the next one year? Whatever happens in the next one week from one year perspective what can you feel?

Chokhani: There is no option in the rest of the world-you cannot solve a problem by austerity and the only way out for them is to take the world's marketcap up from-whatever was the peak of USD 60 trillion to maybe 100 trillion in nominal terms and that solves the debt problem. As long as the world allows them the freedom and the luxury to keep printing notes and we don't want to let currencies move, the inevitable effect of that is inflation in asset prices, inflation in product prices and that's what happen to India as well this year that whether you look at coal, copper, soft commodities, gold, platinum or the Indian markets-they are all pretty much up 25%.

We are kind of the same trade and if say earnings will grow another 20% in the next year, there is no reason for the Indian market to de-rate and therefore its very likely we could be 20% higher next year with whatever hiccups happened during the course of the year and even this year the bulk of the gains have come in the last two months. So, on a Diwali-to-Diwali perspective it's a good bet to take that, you should be 20% up.

Udayan: What do you think? You are generally the most bullish of the lot-20% or more than that?

Jayakumar: At the risk of throwing my hat in the consensus ring, directionally, one is clearly there but the devil is usually in the detailing. Liquidity by definition will be there. I think quantitative easing two (QE2) etc are in a sense a terminology that we are adding to what is now organised liquidity being pumped in with the view to de-rating the dollar; with the view to bumping up with some help of the central banks with a fuel of China, India etc, the currencies. So in a sense the purchasing power of the Indian Rupee will drive consumption. So whether it is holidays or it is buying Nike shoes in Orlando malls-at the end of the day consumption needs to be driven not necessary in the US but out of US malls and out of US stores.

Frankly, if they have articulated this to say that, "We need a weaker dollar"-it would not have happened. But doing it in this way, slightly convoluted, but the end result is a weaker dollar and whenever the dollar does rally you see the sell off in the dollar is almost as vicious. The origin of this entire thing has been the success of the currency markets. Volatility, for this last year, has moved entirely to the currency markets.

The Indian and the Chinese are holding their currencies back. But if you take the example of what has happened to the Singapore Dollar or the Thai Baht or a whole host of other currencies-those markets are up much more than India-35-40 even 50% in some cases. The currencies are doing as well if not better.

The basic foundation is based on a currency market and the inevitable corollary is happening in the equity markets. So would we be 20% up?-as someone said, that we in dollar terms, are flat for the year. So you have bought dollar and not fooled around trying to figure out the markets for the rest of the year. So the dollar is one more currency that the world is discovering.

My own feeling is, yes we will be a lot higher, but we need to be a little careful that it will not just necessary be an index play through the year. It may be a lot more to do with stock specific action. Yes, when new money gets allocated in chunk, say USD 5-10 billion kind of chunk, then inevitably the index moves up. But apart from that I think the origin is all currency led. There is a lot more action which we need to focus on in the currency markets.

Udayan: You think the rupee could be at 40 to the dollar in 2011 once again?

Chokhani: I am not a currency expert.

Udayan: What do you think?

Chokhani: It is all a function of what the Chinese do and because the Chinese are letting their currency up India has been holding back. Like Jayakumar said, Singapore Dollar the Korea Won their up between 5% and 10%, so are we. The Japanese Yen is actually up 15% year-on-year in the kind of weakest economy of the world. Clearly, the world needs the Asian currencies to go up and every one is focused on what China does. They have come out with the statement saying that they will get their workers wages to double in the next five years and that inevitably means much more pressure on that economy. That has actually led to a big boom in textiles for example in India.

A lot of the worries we had on whether currency going up will affect our competitiveness are a bit misplaced because it is about productivity now, it is about consumption and it is about scale and if we keep fighting battles of 20 years ago this economy is not going to be much larger.

So I hope for the rupee to be north of 40. If you ask me what do I expect?-I keep looking at what Beijing is up to.

Kela: Having seen the rupee already appreciated by more than 10% from that rise-let us not forget that there is a differential of inflation here. So if you are expecting the rupee to appreciate by another 10-12%, add another 6% of inflation differential. We are 7%, they are at 1%.

Chokhani: We won't have inflation then. If the rupee appreciates your inflation should come down. 

Kela: Inflation, even if it comes down, I don't think it will go to 1%-so whatever inflation differential, which you have to think, so you are talking of 15% rupee appreciation over the next 12-months. In the context of our large current account deficit, which we are funding and that is largely consumption, I think it will be very difficult to see the rupee going to 40 to a dollar in next 12 months.

It is in an appreciating direction without doubt and I don't think even China will allow this kind of dramatic-because their dependence on the export market is far larger than India's dependence-so if they actually appreciate the currency by 10-15% then there will be a different kind of a chaos in the world.

Udayan: What about gold-20% up Diwali-to-Diwali? Can you still back it from here?

Damani: Absolutely. It is a no-brainer. Gold is the ultimate store of value. When governments world over are bent on destroying the currency the public is going to get wise and invest in gold. Someone pointed out-inflation adjusted gold should be 2000 as we speak today. It's still below the inflation adjusted price, so you don't take in the premium for the store of value that gold historically holds. I think it's almost certainly headed higher.

Udayan: Do you think we have a risk of commodity inflation in 2011? If liquidity pans out the way all of you are describing-can crude be at USD 100 per barrel plus again?

Damani: I don't know about crude but across the board commodities will go up. It's almost inevitable that hard assets will go up whether its real estate, whether its emerging markets whether its commodities. As Jim Roger says, "Its heads I win; tails I win"-it is that kind of situation in commodities because if say the economy recovers with QE2, then commodity prices will go up because the demand will go up. Suppose it doesn't go up then liquidity will move itself into commodity prices. So it seems like its going to be very volatile but basically uppish here for commodities.

Kela: But that is clearly the biggest danger to the Indian market story because let us not forget the marginal cost of production in non-OPEC countries is already at USD 75 for the new finds, so it's uneconomical. So you are seeing the production contribution of non-OPEC countries continuously declining over the last one-year. So if the world really recovers and if emergent market continues to do well that USD 100 per barrel plus crude will be the biggest risk to our markets.

Jayakumar: In fact, the biggest side of flipside or antidote for that is actually an appreciating rupee. Unlike China which imports in size and exports in size maybe finished products-maybe low-end-India is actually largely a consumer and importer of commodities. For us, the biggest antidote for this scenario panning out, which seems to be the case, is today you have crude at USD 80 per barrel in what is largely a world struggling to get up on its feet.

I think rupee at 38-40 to a dollar is a paradigm we have not tested. In fact, if there is one consensus which is emerging that RBI has got this absolute fetish for a weak rupee. I would like to remind people that between 1985 and 2000, we had a one-way secular declining, depreciating rupee. After that in a 10 year range it has been largely kind of flat to range-bound. In this scenario it is not as though the software exports have fallen off. The TCSs and the Infosys-the real companies in the space continue to.

It is only myth of, I would say, textile exporters and gems and jewellery guys, which we keep addressing-the people who sort of feel that they are going to shutdown-the fact of the matter is time, given direction the exporters at the end of the day will adjust for quality will adjust for cost. And if we as a country have benefited lot more on the consumption side, I think a 38-40 rupee is actually on the cards. Now when it happens, China on the other hand may not be able to move their currency just as fast and therefore to that extent where they export and where we compete with them there maybe some trade offs. But otherwise what are we talking about?-44 going to 38-40 is another 10% move. It's not that big a move in the context of emerging markets, in the context of currencies.

The Dollar Yen is at a life time high. It trades just over 80 and it touched 79.9 way back in 1991 or 1992 and the exports of Japan have not actually collapsed as a result of this. Exporters will make the adjustments. The question only is instead of pampering them I think we should take the software example, where the real companies continue to grow and it's true that in the last 10 years whether the rupee has gone up or down, the software exports have actually adjusted and profitability is adjusted accordingly.

Chokhani: Up until last December the largest exporting country in the world was Germany. The euro has gone from 0.9 to as high as 1.4, however, German exports never went down. So if we keep thinking the way it would grow and become wealthy through exports is by keeping a weak rupee-Bangladesh is where we should set up facilities and not in India.

Jaykumar: While I am great admirer of the RBI on their liquidity management etc maybe they are little too tight liquidity but on the Dollar Rupee side I think they still operating in s 1985-1990 framework and I dare say that if the German Marks (DEM) had been a floating currency as opposed to the euro, it would have been trading at life time highs.