Sensex hitting a new high of 21,294 came as a surprise, but there was no doubt in Rakesh Jhunjhunwala's mind that the market's direction was skyward. Jhunjhunwala, who owns Rare Enterprise, is slightly reluctant to call Sensex's milestone a "new high" because of the stark absence of retail investors. He also frowns at the brouhaha over FII buying because, according to him, it has been constant. However, the ace investor believes the market is headed north.
A couple of months back when the rupee was making a new low everyday despite efforts by government and central banking authorities, even the superbull Jhunjhunwala was frightened.
But now his outlook for the market is brighter. Despite low participation from across-the-spectrum players, JhunJhunwala is relaxed because "the market is safe to the extent that there is no bubble."
Below is an edited transcript of Jhunjhunwala’s exclusive interview on CNBC-TV18
Q: Would you say that you are pleasantly surprised at the way the market has taken off the last couple of months? Would you have thought, even two-three months back, that we would be trading at all time highs by Diwali?
A: I don't know whether I thought we will make a new high or not but I certainly thought that the market, the way when the rupee went to 69-70 against the dollar, all of us, including Rakesh Jhunjhunwala, had a fright. And the way the market bounced back, it took all of us by surprise. Then seeing the price movement, I was only very bullish from a level of 5,300-5,350.
In the last seven-eight days, the movement of the market clearly indicated that it is move is going to be upwards because it rose from 5,200-6,200, it gave a very poor correction to 6,070-6,080 and then again it took off. So I will not say that I knew about it two-three months back that we are going to have a new high. But I surely thought the path was upward and the way the index behaved, the last seven-eight days gave me a feeling that we are going to go higher.
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Q: What is the price action telling you now because as you said, it consolidated nicely, just a shallow dip and has now taken out an all time high? Would you expect a pause around here or do you see the market having broken out and heading to a significantly higher high this time?
A: It could pause here but I don’t think it is going to lose much. Eventually, the direction is upwards because the psychological factor in the market—I will not say it is decisively at a new high; the Nifty is still not. But there is no participation; there is not much commitment in the market. The buying by the foreign institutional investors (FIIs) is constant. So you have a situation when someone is buying goods every day, markets are going up and nobody wants to participate.
So markets will go down once there is excess commitment, which I don’t see at the moment or if there is stretched selling of actual sales, which is not happening. So I personally think we could pause, it could take time but the direction is certainly upwards.
Q: Do you see this global flow situation turning around for any reason and do you think that remains the fundamental risk to this market even now?
A: No, what I feel is that the foreign investors are underweight India. If you look at the ratio, it is a complicated thing, but if you look at Indian gross domestic product (GDP), it is about 2 percent of world GDP. It is about 2.5-2.6 percent of world GDP and Indian marketcap is 2 percent of world marketcap, approximately. But 2 percent of institutional money worldwide has still not come to India.
So in that sense, the world’s institutional investors are underweight India. I also feel that they have a belief in the composition of the economy in terms of services exports. I think there is innate feeling now that Mr Modi, or the combination, NDA would come back to power, your sister channel has yesterday said in four states they will reach 195-200.
They could easily go to 235-240 and the Bharatiya Janata Party (BJP) to 200. I think that is helping the market. Certain section of the market—pharmaceutical, software—they are not affected at all by the slowdown. Also, a lot of people are saying only select companies are participating and other midcap companies are not participating. I agree. It is not that midcap companies are not participating, if I have bought 10 midcaps in the last one year, I am gaining on 8 of them and in some of them I am gaining substantially. But the fact is that the market is safe to the extent that there is no bubble. Maybe valuations are stretched but you are not stretched by any valuation at a level where you even call it a bubble.
So your good quality companies have gained therefore the downside risks are lower. You don’t have any bad companies gaining. You don't have mass participation, so there are very few weak holders. So, I remain hopeful.
Q: When do you see this problem sorting itself out? I take your point that if you have selected stocks well, some midcaps have done well but there is some truth to the fact that this has been not a very broad participation rally in the sense of a lot of universe of stocks rehitting new highs. Do you see that changing around or this market remaining relatively narrow compared to previous times when it hit new highs?
A: As the economic condition improves, the policy equation will be greater and there has been some sea change in management that enthuses. Jaiprakash Associates have sold seven plants and I am told they are going to sell their power plant. So, it is for the first time that Indian corporates are selling assets instead of raising equities. Hence, these are sea changes that the market will recognise.
Q: Getting back to that old point that you were making about the politics of it, do you think that in the the last few days the market has begun pricing in at the size of electoral verdict maybe from taking cues from state elections few weeks down the line?
A: A lot of people are of that opinion. I also meet some foreigners and a lot of them are confused but don’t you think the NDA will come into power.
Q: The wind seems to be blowing in that direction from every survey that one can read – but my specific question is do you think the market has begun pricing it in because it seem to be in a slight quandary even last month but it almost appears that more and more people are getting confident that that’s the way the wind is blowing?
A: Yes it is. The market smells that, it knows that it may get the government of its choice.
Q: On this point that you made earlier about the market not being too expensive, the leaders of this rally IT, FMCG, pharma, in pockets valuations do not appear very cheap. Would you take profits in some of these names which have lead this rally so far in the largecap universe or do you think there is still headroom there?
A: Seeing the price movement, I would not like to take profit in anything. On the upside, anything can happen. Stocks are showing no meaningful correction so why should we preempt? Some of the high valuations are absolutely justified.
Q: You would stick to high quality even in IT which you have been bullish on or you would go towards something in the sector which has slightly greater comfort in terms of valuations?
A: I do not think all valuations that are numerically high PE are wrong.
Q: When does the underperforming part of the market start to perform? When do you see the industrials, some of the cyclical – there has been movement in certain pockets but when do you think largecaps in those spaces start to deliver as well?
A: It depends on various factors. About 10,000 megawatts of electricity power from Reliance Gas is not available. Once Gujarat Gas comes in, which is slated to come by March-April next year, it could help a lot of infrastructure sectors who are not operating to operate the power plant once more projects are awarded.
A lot of the injuries are self-inflicted; the kind of leverages some of these firms have done may lead to them never coming out of these isssues. When the market is so beaten down, there is a lot of scope for it to go and some of the beaten down market may never join again.
Q: Do you own any auto stocks because that is another part of the market which has done very well over the last one year or so aside of IT, pharma, FMCG?
A: I am very bullish on Tata Motors and Escorts and I say this while giving the disclosure that I am interested in everything that I say.
Q: About Tata Motors you have spoken to me in the past but Escorts, is that a relatively recent purchase?
A: It has done very well. Look at the performance and there is great improvement.
Q: What about telecom, I have never heard you speak about telecom but that also started performing quite well over these last few days?
A: In fact it’s the best performing stock Diwali to Diwali. Reliance Telecom and Aditya Birla Group’s Idea Cellular are good but I have not invested in them and I have no intent to. I am confused about telecom.
Q: Why the reluctance?
A: I do not understand the business and where there is too much government interference. Hence, I do not want to go.
Q: What about banks. This is the week where we have seen public sector banks bounce back after a long time. Are you bullish on financials?
A: Some of the financials are good at these valuations. I think financials made a good move. The move is still not over.
Q: Where is the Nifty heading? If we do take out 6,350 conclusively, where is it headed?
A: It is headed upwards.
Q: Do you see it heading to 7,000?
A: Who knows? We can predict the direction not the depth. But, it will take a lot for the Nifty to go below 6,050-6,100. It will not break that level. There is so much left out feeling; there will be a lot of dip buying coming.
Q: Do you sense that left out feeling? Or is it different this time that despite a strong move, people still seem reluctant to participate?
A: They seem reluctant, but as history has told us, as markets goes up, people come in; everybody will come once the markets hold on and go up.
Q: What about the rupee? Do you think we will not see 68-69/USD anytime in the near future?
A: The rupee is in a range of 60-63/USD. People are buying dollars and selling rupee and building up the reserves. Within this month itself, we have got USD 2.5 billion in the equity. We are getting the FCNR deposits, gold imports. I want to see how well and how far Indian exports go.
The markets are not doing well, but last month was the highest amount of steel ever produced in India in one month. Imports are out and exports are on. It is due to the effect of the rupee.
Q: Is there anything in metals in your portfolio at all or still a no-no?
A: I have no investment in metals. I have some trading positions can be locked out tomorrow. They can be locked out day after, they can be added upon. I have no positions in the steel stocks but they are just there. I don’t know how long I will hold on.
Q: What about gold? Do you think it has seen its peak? Is it not going to stage a comeback and be a losing investment?
A: It is difficult to say because this year it has been aided. The fall is about 6 percent but if it is not for the duty and the dollar, the fall would have been much greater. It is very difficult to predict, but internationally it is pertaining a difficult conclusion.
In every Indian household, there is some amount of gold and my wife and your wife will buy gold whether we ask them or not.
Q: What is the biggest risk to this market? Where you would modify your trading opinion? You said 6,000-6,050; is that the new floor to this market?
A: I would think so.
Q: So, 5,200 is history. Is it unlikely that we will see that level between this Diwali and next Diwali?
A: I am hopeful, we never see them in my lifetime, why next Diwali.
Q: What are you doing with pharmaceuticals? It has been a big bet of yours. I know you have got a big ownership in Lupin. Have you been adding new stocks and positions? Do valuations worry you there?
A: You ask me opinions. Don’t ask me what I am doing.
Q: Not from a trading perspective, from an investment perspective?
A: Pharmaceutical will do well as fast moving consumer goods (FMCG) is going to do. It is going to be a continuous growth.
Q: Have you seen any signs of more fundamental economic turnaround or an earnings turnaround yet?
A: Certain sectors are doing very well in earnings and people like Raamdeo and all are saying that earnings have come around expectations. There is a lot of expectation that with good monsoon, the sales of FMCG will be positive.
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