2010 was the year of equities. Across the world, equity markets delivered strong returns despite the sovereign debt crisis in the eurozone, which caused huge periods of volatility in the middle of the year. However, the Indian markets saw a surfeit of liquidity thanks to quantitative easing measures taken by the government.
But at the start of 2011, political scams and corporate governance issues combined to create a huge dent in the Indian stock market. Even reasonable Q3 earnings failed to excite the market. But just when the market seemed to have come to terms with these issues, geopolitical tensions in the Middle East surfaced in February, which have sent crude prices soaring above USD 100 per barrel and the Sensex to 18,000 levels.
However, ace investor and partner of RARE Enterprises Rakesh Jhunjhunwala feels that India is still in a cyclical bull market, which started in 2003. Although he is extremely bullish on India, he hastened to add that India will have to counter rising crude prices and hope for a good monsoon. "There are two crystal balls you have to see. One is the monsoon and the other is the oil price. If both go in India�s favour I am extremely bullish."
Jhunjhunwala cautioned that with India importing most of its oil, crude is a big blockade for it at the moment and as long as it stays above USD 85-90 per barrel, he sees upsides for the market being capped.
However, Madhu Kela, Chief Investment Strategist, Reliance Capital sees an inverse correlation between the market and crude prices in the short-term. Speaking on crude, he said though there is no case for crude to be at its current levels, he added that if the situation escalates in the Middle East, especially if things start turning for the bad in Saudi Arabia, then crude may hit USD 150-200 per barrel.
Even as pundits expect 2011 to be a challenging year for India, in his eyes, Kela sees 2011 as being the year of the stock picker. According to him, the midcap index, where the real opportunity lies for investors, has numerous stocks available cheap across the spectrum. "I will be a systematic investor through this difficult year and buy companies with conviction with a three-year time frame," stated Kela.
Akash Prakash, Amansa Capital sees the Nifty bouncing between 5700-5200 over the next six months. According to Prakash, the Nifty seems to have made a bottom at 5200. Prakash said that if India regains control both politically and economically, then it should make investors feel a lot better about its growth outlook and the country as a whole.
Below is a verbatim transcript of their interview on CNBC-TV18. Also watch the accompanying videos.
Q: What is your tactical view on India as a market?
Jhunjhunwala: My view that we are in a cyclical bull market. I think India is very much in a cyclical bull market and in my opinion it started in 2003 and it�s going to last for long time to come. While I do agree with all his other points that commodity prices are a big I would say blockade to stock markets over the world and especially in India because India is an economy which is especially sensitive to oil prices was not in terms of inflation, the current account deficit and so many other implications. It�s also an economy where it has not been passed on to the consumers.
So I tend to agree with whatever Ruchir Sharma just said. Only one thing I would like to point out that I don�t think necessarily that India and the western world is going to move in tandem because we cannot forget that the Sensex was 3000 in 2003 and the Dow had reached 14,000 and today the Dow is below 14,000 levels and the Sensex is six times that level (comparing level of Sensex in 2003). So essentially over a period of time we have outperformed the western markets considerably and I think that will continue.
Q: What about tactically? What about say a period of six months and nine months - one year?
Jhunjhunwala: That�s difficult to predict but I can�t say what's going to happen in the next six-nine months except that India is far more sensitive to oil prices than maybe the western world.
Q: Are you tactically cautious therefore than you generally are?
Jhunjhunwala: Stock markets are always cautious. It�s always cautious.
Q: Don�t evade the question. Are you bullish for the next nine months or not for the rest of this year?
Jhunjhunwala: No, you asked me a question, I gave you an answer. I am not evading. Don't act like a tax administrator, it�s not about evasion.
Q: I am rephrasing my question, are you bullish for the remainder of this year for India?
Jhunjhunwala: There are two crystal balls you have to see. One is the monsoon and one is the oil prices. I think if both come in India�s favour I am extremely bullish. I think both can be a blockade to India and at the moment oil prices are a blockade. So as long as oil prices are above USD 85-90 per barrel I think the upsides are capped in my opinion.
Q: You've got a different perspective, so much of the current talk is around you tell me where oil is going to be and I will tell you where the Indian market will be? But your view is that maybe we should not be drawing this one to one perfect imbursement correlation with crude?
Kela: I think in the short term whether you like it or not there is a correlation and the markets will behave in the short term like that. Only two-three things which I would like to point out one is related to oil and the other is related to markets, it's about India. In 2009, oil was 7.5% of our GDP and the average oil price in 2009 were USD 90 per barrel. This year 15 days are left I think oil would be 5.8% of what total GDP is and the average oil price this year is USD 84 until now. So, clearly domestic production as a risen by 13% this year so oil definitely hurts us but maybe the dependence of oil about India is decreasing as our GDP growth.
I think one thing that has got completely unnoticed in all these debates is we are already talking about being a USD 2 trillion economy by 2012. So that is one part relating to oil. If this oil really goes significantly higher than where it is and what Ruchir presented if we have to believe that all these commodity prices are driven by excess liquidity or a speculative phenomena then there is no case for oil being where it is. So it is only a matter of time when it will fall.
We don't know, tomorrow if this situation escalates goes down to Saudi Arabia for all we are speaking oil will be USD 150-200. But there is no case for oil being at where it is and if the commodities correct and oil corrects, that's a very sweet spot for India.
The other thing which I want to point out, while all of us are looking at Sensex and Nifty and Nifty being at 5,600 and Sensex being at 18,000, the real index in my opinion, the real midcap where the real opportunities are is well-well below these indices. There are so many stocks which are available so cheap across this spectrum. So I think 2011 though broadly I agree that it is going to be a challenging year and it is very difficult for the market to make new highs.
But this is really a year of stock picker you need to systematically buy because only god has to come and tell it in my ear that oil is going to fall below USD 80. I don't know when it falls. So I will be a systematic investor through this difficult year and buy companies with conviction with a three-year time frame.
Q: What is your sense? At this point would you draw the line at 5600 Nifty or do you think we may - on the way up?
Prakash: No I think for the next 6 months is a trading zone for India I think 5,600-5,700 are on the Nifty on the way up, 5,200 on the bottom, I think the markets will bounce around this range for sometime.
Q: Is 5,200 the bottom?
Prakash: Yes, I don't think it goes much below that, of course oil goes USD 200 or something, hopefully will not happen, but otherwise I think that, that level will hold, because I think in that level the valuations become reasonable, what Madhu is talking about and even broad market valuations come to long-term averages or slightly below that. I that next 6 months are important also in my opinion because the markets don't really look at the government, and figure out, I think it presented a reasonably decent budget in terms of change of orientation, much slower spending growth, talked about trying to regain reform momentum on a whole bunch of bills and stuff like that.
In the market we will see the next six months and see what the government does. We will know the next six months are these reform bills are going to get through parliament or not. Is there going to be any action on government or not or is the government going to meet its spending target and fiscal deficits targets or not?
All these are very clear in the next six months. So I think, I broadly given Ruchir's view that if you are doing that to break out, unless commodity prices at least normalize, and stop going up and come to more normal level.
But I think the one factor which we should not ignore is that to a certain extent, India's destiny to a certain extent is in its own hands because people are very down on this government. The credibility is zero with government and if you read the press table nobody believes they can control spending, nobody is believes in any bill passed in parliament, nobody believes they will take any action corruption and governance.
So that is a potential supply that if they actually regain control of the economic momentum and regain political momentum, that could be something which is independent to what happens globally, could make people feel a more lot better about India and our growth outlook.
Q: But what worries you more about in these India specific factors that you just outlined or what happens to the world in the next nine months?
Prakash: A combination of both. I mean obviously commodity, everyone talks about. So, that is the problem because our linkages, then our exposure to commodities. But the reality also I think is India is going through a broad de-rating because you can't be the most expensive market in emerging markets with the type of governance and lack of reforms that we have.
And the reality is corporate earnings expectations were too high in the beginning of the year. I think we have a serious inflation problem. People are worried is the inflation cyclical or structural, there are debates about that. So I think the India story initially got clouded by itself. India was down below 15% before oil went too USD 125 right?
So that was an India specific problem. Governance, inflation, interest rates, earning expectation is too high. We have got our own self inflected weaknesses. They have been compounded by the global macro situation that we find ourselves in today. So I think even if global macro remains not great, if we can correct our own self inflect weaknesses, corruption, governance, inflation reforms, India will do better than people think.
Q: You have always been bullish about India per se, your problems have been with the world, do you agree with Akash's assessment that it�s India specific problems which have led to de-rating?
Jhunjhunwala: I would say it has led to some of the premium being shaved off. I don't look at them as problems, it is part of the economic growth process, it is part of the democracy. I think it is good all this is coming out because now every Prime Minister will think well before appointing a new CVC Chief. Telecom spectrum is now always going to be auctioned. So it is part of the process.
Sometimes I have a very radical thought in my mind. What I feel is that oil should go to USD 180 then only these elephants will wake up because we acted only in 1991. Yesterday we had a session with Mr Yashwant Sinha, I asked him that every politician knows what's needed to be done. You can�t run India with Indian Telegraph Act passed in 1883. In the 21st century you are running Telegraph Act of 1883, you can�t pass a Companies Bill which was introduced 6 years ago. I said you are in power or Congress is in power what difference does it make. These are all non-political laws. So I think it would be good, I mean maybe for short term we will get a shock. But we need that kind of a shock somewhere I feel to get Indians to act. I really feel, how do you get them out? You can�t do anything, can�t say anything.
Q: Is 5200 the bottom?
Kela: I am not evading the question. My mind is very clear. Whether 5,200, 5,000 or 5,600. We don't know where the index is. I am really focused this year to identify good companies, buy them from a 3-year, 5-year perspective. This is one of those 2004 to 2006 era where across the board you are getting companies really cheap.
Today we ran some sensitivity. There are 80% stocks trading below 2007 peak levels while in these 50% of these cases earnings have doubled from 2007 levels. So actually valuations have become 25% of what it used to be in 2007-2008 levels. So I am really focused this time around. We can get into a global debate where the markets are. But finally the money is being made when you invest in the right companies.
Q: Do you think this is just a 6-9 month kind of tough phase after which we get back onto a bullish kind of trajectory for India?
Jhunjhunwala: I would like to make two observations, although I agree with Ruchir that financial speculation is playing a very large part in oil prices. But even if Libya is solved tomorrow, the problem is how do you know whether something is going to happen in Saudi Arabia or not. I have not read anywhere in any part of the international press, anything about any problem in Saudi Arabia or Kuwait.
But still they say there is this lurking fear and to my mind what troubles me is why the Saudi Arabian stock market is down 24%. So even if the financial speculation is going correct there is always going to be a risk premium for the next 3-9 months on oil prices. If nothing happens in 3-9 months then people will tend to forget. Second observation I would like to make is that the Indian public has never participated in this rise from 2800-2900 effectively.
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