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Bull vs. Bear: Will this market rally end or continue further?

This article was posted on Sep 16, 2009 and is filed under Market Outlook

ET: Shankar Sharma, Vice Chairman & Joint MD First Global and Rakesh Jhunjhunwala, Partner, Rare Enterprises, battled it hard on our
television channel ET Now. They see the current rally differently – both in terms of the reasons that have caused this big up-move and also in terms of what lies ahead. Here is the transcript of the first part that was telecast last week. The next part will be telecast later this week. You can watch it on ET Now and also read the transcript on this website.

Indian markets are up more than 60% this year and are off only 30% from their all time high of 21,000. What is driving Indian markets up, money or earnings?

Rakesh Jhunjhunwala: I do not know whether the market is liquidity driven or earnings driven because we do not know – sometimes market rises precede earning rises. I mean markets go up because there is a positive bias. So, I do not believe there is any market in the world which is necessarily liquidity driven; markets don’t set interest rates, generally governments do and realities do. Interest rates worldwide are at extremely low levels and are expected to remain at low levels. That is driving lot of money to assets, both equity, debt and that is not only an Indian phenomenon, it is a worldwide phenomenon.

Shankar Sharma: First of all what is liquidity, I am not able to define. There is no real measure of liquidity. When somebody comes and buys stock and he puts in let us say million dollars, we say a million dollars came in, but, for that million dollars to have got in invested somebody sold a million dollars, so net liquidity in the market is always zero. So, I do not understand when people say that money came and hence markets went up or money went out hence markets came down. I always say there is somebody who bought and somebody who sold on the other side of the trade and net liquidity was always zero. So the problem with all of us in markets is that we want to explain every market phenomenon based on some rationale and some logic, but, not at all times are markets supposed to behave logically. But, the human mind cannot accept that sometimes strange things happen.

What about global macro. Economies have improved but the popular consensus is we are still not out of the woods?

Shankar Sharma: Steel prices have gone up in the last four or five months globally by about 20-25%, but, steel demand is contracting globally, it is down 15%. Oil prices have virtually doubled. All estimates by the IEA or any other estimates have been successively revised downwards even as we speak right now in the same period, there has been no upswing in demand.

Rakesh Jhunjhunwala: OPEC has cut production dramatically.

Shankar Sharma: That is an ingrained response to falling demand. Obviously, they have to react to a certain situation in the market. Fact is, oil has doubled. But, it is not accompanied by any great demand shift. Fact is, that in my view, at least the commodity part of this whole rally globally is nothing but a technical correction of a very-very sharp and furious fall in which we saw copper fall 65%, oil went from 145 to 30-35 in a matter of 4 months. It had to have a corrective move. In my view that is precisely what has happened.

So it is the excess money which is helping the system, is that what you are saying?

Shankar Sharma: No, it is nothing but a pure technical correction, the commodity rally which is what leaves me to believe that part of this bull market, the commodity end of the bull market is completely lacking fundamentals. This is the area where I see the maximum risk to global markets including to our markets in the subsection where commodities are dominant, for instance your steel stocks or your sort of quasi stocks.

Rakesh, your reaction to the points Shankar has flagged off.

Rakesh Jhunjhunwala: All economic information worldwide is surprising us on the upside. Secondly, there were two aspects of the fall. One was the downturn in economic activity and the other was the fear of the breakdown in the world financial system. I would now give the second a very-very remote chance. I think that itself is a source of big relief to markets. As far as economic activity goes, nobody expected France and Germany to have positive growth in the last quarter. Second, I personally feel that the Indian corporate sector has responded extremely well to this crisis. I think India as a country as an economy has responded well. There are some signs of recovery in the western world. I could never have thought that for the next 5 years home prices in America could ever go up but the fact is that they have risen in this quarter or previous quarter. According to reports, UK has had the biggest price rise for quite sometime in house prices, Nissan is putting up its biggest small car plant in India, Maruti is raising its car capacity by 1 lakh – its Managing Director is saying its capacity is already full. So, there are a lot of reasons why markets are being what they are. I feel very happy and proud to say that I recognised and constantly repeated for the last 6 years – in fact where everybody ignored that there is a mountain of local money waiting in industry to come to the markets.

Shankar you have in the past dismissed the theory of decoupling, but, look at 2009. India is the best performing large market so far.

Shankar Sharma: You know the disconnects are beginning to happen now, which is that China is falling. Now you can say that why should China matter. In markets for sometime nothing matters but eventually everything does come back to add up to a certain perspective. My view is that China created a huge bubble and I have spoken about it many times. That they have consumed in the last 6 years as much steel as what the US took 30 years to consume, even in the best period of USA steel investment. It is not sustainable, that is a huge bubble, it has to burst and I think you are already seeing signs. Once that happens in full force and I think it will, I do not see how other emerging markets can escape that.

Can India escape China because Indian markets are the 52-week high, Chinese markets are nowhere close to a 52-week high?

Rakesh Jhunjhunwala: See, I would like to sum it up, India is also not close to its highs, China went to 6000, it is currently at 3800, 50%, maybe we are at about say 70% of the market level. Lot of people say China is a bubble but I think China is not a bubble for what it did in the last one year. I think China is a bubble for what it has done for the last 15 years, but, the fact remains that that bubble continues.

Do you think it will continue for next 2 or 3 years?

Rakesh Jhunjhunwala: I do not know, I am not the authority to predict, but, the fact remains that as soon as China is able to replace its export for local consumption, I think that is the time when China will really be on its own. All I can say there is tremendous and humungous doubt in this rise amongst all of us. Technically, people are not committing themselves. Even now there is abundance of liquidity waiting on the sidelines worldwide whether for Indian assets or assets abroad. Now, where this will take us and where it will end, I do not know but I can surely say one thing, the fall from 6000 to 2500 surely gave me an opinion that this is not a correction in the bull market, this is the reversal of the entire bull market. But, the way the Indian markets have responded back and the way in the face of this drought, they are not going down and that the way corporate India has responded, I personally started believing more and more, the entire fall was only a correction.

If it is still in the bull market?

Rakesh Jhunjhunwala: Yes, there was and there is going to be a continuation of the bull market and when you look at India and the world, what is going to affect India – primarily software exports and commodity prices. Lower commodity prices and good software exports are India’s dream. BP has given a $2 billion deal. Whether it is Accenture, whether it is IBM, whether it is Infosys, whether it is HCL, whether it is Wipro, it is all going to be done out of India. Exxon is on the same lines. So, Indian software exports grow and commodity price remain reasonable. I do not see any reason, I do not think our exports are so important and if you get and act together, I would see no reason why India as an economy despite problems in the world economy, may remain in a bull market. Do not forget the mountain of local money which is waiting here – in August FIIs sold Rs 10,000 crore in 10 days and the markets did not go down. It was all local money and I think the local money is going to go up day by day, week by week, month by month and year by year and that is all long term money which is not going to be withdrawn.

That is a valid point, Shankar, is not it, let us not underestimate that how Indians are underleveraged, less than 3 to 4% of total Indian saving is only in equities, it has to go up only?

Shankar Sharma: I do not buy any liquidity theory. It is nice to explain things in these simplistic terms. Markets are a little bit more complex in that. Markets will go up, markets will come down, I mean FIIs sold so much money as Rakesh is pointing out, why did not market come down. You were saying somebody has bought. I am saying it does not matter whether it was local or foreign or somebody, somebody always has to be on the other side of the trade. So we over intellectualise what is a very straightforward thing that markets will go up based on fundamentals.

Rakesh Jhunjhunwala: N, but, I disagree with Shankar because liquidity can be sucked up by fresh issue of equity. When I do an IPO the person who is selling an IPO or doing a QIP is not necessarily bringing back their money into the market, he is not bringing the money into market at all.

Shankar Sharma: That is a different end of the market, which is not coming to the secondary market; that is a primary market related flow, so let us exclude that for the minute. The short point here is that, you know, I have always said globally, worldwide you can go back to the history of time, you always see asset prices inflate, so all by that token there are no real bear markets ever in asset prices, particularly equity prices. Look at the price chart of the Dow last 100 years, you will see exactly that, every correction or every bear market 20 years later will just look like a small correction. That is the nature of this beast but that does not mean that bear markets do not occur.

Do you think this is a bear market, what we have reported right now is perhaps a very sharp upward correction in a 2-3 year bear market?

Shankar Sharma: See, my view last year was and I do remember at the ET Now event, I had said that I would not be surprised that if the markets close sharply higher this year from where they were last year. Which was I think 9000 or thereabout, because my view was that we had gone too far too fast and we had created enough room on the upside for stocks to even double or triple and still not get anywhere close to their highs. Which, actually speaking, is the case right now. Lot of stocks have gone up 3-4 times but they are still a good 30-40-50% away from their highs. Now, we have justified the rally based on the liquidity theory or the China theory. In my view the China theory should be at this point viewed with a lot of circumspection. The liquidity theory within the context of emerging markets I must say, I think India will definitely outperform, that I am pretty sure about.

Rakesh, I know you want to react to Shankar, do not you?

Rakesh Jhunjhunwala: The markets went into the depth of depression. Now, pump priming or whatever reasons, you know, the economies have surely done better than what they have done earlier and they have done better than what people expected. I was just reading Paul Krugman in the morning. He himself has become optimistic as I am not worried about the government deficits and I see no signs of that improvement tapering off. Only now expectation is coming that it will taper off today, it will taper off tomorrow, look at copper prices, it maybe technical or non-technical but I if I understand something of technical analysis, if I see copper pieces I am not going to short sell copper. It has gone up from say 2500 to 6400, just does not correct.

Can Indian markets or the headline market surprise us?

Rakesh Jhunjhunwala: I want to remind you one thing and I want to tell you from experience that the bull market started in 2003 April. The stock, Praj Industries, which gave me the highest return in the bull market and actually which went up 40 to 50 times and I made a substantial investment in it. So question is the opportunity will always lie in the market, right and see, we never thought, even Mr. Ambani never thought that Reliance will ever, effective price will become 4500 from 300. Reliance went up 15 times. I think already Infosys is close to its lifetime highs, I think it was…

Shankar Sharma: 2400.

Rakesh Jhunjhunwala: He is right. If you look at the new 52-week highs and the new lifetime highs there are a lot of stocks. See, what happens when bear markets rally, first of all they do not last so long, then there is lot of pent up selling waiting in bear markets. I think all those phases are over. You thought I think they have already sold Rs 15,000 crore of QIPs. Despite that, I know they have closed a $75 million QIP, demand of $125 million. So, we do not know where the money is coming from, we do not know who is buying, all of us are sceptical and extremely careful including myself. I would term my opinion as optimistic toward very cautiously optimistic but the fact remains that markets go up day upon day and if you look at price formations, look at Tech Mahindra, look at Mahindra Satyam, look at LIC Housing Finance, at every stage the stock goes up, it goes up Rs 40 or it goes up Rs 20, it corrects Rs. 5-7, spends time, the next move… So, even if this market were to end shortly, it cannot end without a big burst where you know, you are going to have a 500-point rise in the Nifty in say a month and everybody will participate. I do not think this market…

Are not we there, look at how we have appreciated from middle of May to August?

Rakesh Jhunjhunwala: But where is the participation, everybody is cautious; no one is selling his wife’s jewellery to invest in shares. There are no leveraged positions and everybody is cautious, but, the fact remains if you sell, you can sell those stocks, you want to buy, you can buy those stocks. So I do not think this market is going to end in a hurry and I reserve the right to be wrong. Let me make a disclosure, I have a personal interest in LIC Housing Finance and Mahindra Satyam and therefore I am an interested party, everybody please take what I am saying with a pinch of salt.

Shankar, can leverage market be the indicator which would tell us whether there is euphoria in the market or not?

Shankar Sharma: I think if you become micro and all these things you will at least on the broad macro call of the market because here we are not discussing stock like Satyam and in my view I can say unequivocally that has been the one stock if I had the option of selling, actually speaking, my wife’s jewellery and putting into one stock, I would have put it into Mahindra Satyam.

Will you still do it?

Shankar Sharma: Absolutely.

Rakesh Jhunjhunwala: In selling it.

Shankar Sharma: No, buying it.

Rakesh Jhunjhunwala: What I am trying to point out is I am trying to point out the price formation and I have seen a price movement, yeah.

Shankar Sharma: I agree, so I am supporting what you are saying that there are stocks here where I would have, had I got the option, I would have done exactly that because I think these are absolutely no brainer trades, but, we are talking not in individual stocks, we are talking broad markets. There is no sense in saying leverage positions would have brought the market down because fact is we are correlated. Go back March 9th; we started everybody in the world started.

Rakesh Jhunjhunwala: Our rises have been double to 2 to 3 times what the western markets have risen. So there is a clear, see, there maybe a day to day correlation but the Dow may go down 300-200 points, we may go down 20 points. The Dow may rise 30 we may rise 200, so therefore if you see every Asian chart and you see the Dow and the western markets, the Asian markets are constantly and surely outperforming, so the correlation is misleading.

Shankar Sharma: It is not misleading, what you are saying is that there is correlation…

Rakesh Jhunjhunwala: Shankar, the day the Dow and the NASDAQ, the Dow and the Sensex, the Dow was 11000 at one point of time the Sensex was 3000, then they both met it on 10500, today the Dow is 9000, the Sensex is 17000.

Shankar Sharma: No, no, we are talking about the correlation of the move, not the quantum of the move itself. The markets will be correlated, they will rally at the same time but one market will rally more than the other market, which is going to be there.

So my point is that you are going to be correlated, if the world starts selling off sharply you will sell of and I agree if India is an outperforming market it will sell off a lot less. Just as an outperforming market, markets went up globally 40%, we are up 80%. So correlations will be there, so I cannot point to local issues on a very micro basis to make a big macro call and whether India sells off or not, I think we will correlate with the world, if the world sells off sharply India will do the same, albeit to the lesser extent because India is not that exposed to the commodity cycle as Russia or Brazil are but nevertheless to escape that will be impossible, just as India could not have not outperformed or at least performed inline with the global market from March 9th onwards.

So we are going to be correlated, I suspect that when the commodity thing accurately hits home, that the demand numbers are simply not adding up, this is all nothing but a lot of nice stories built around China demand but world aggregate demand is down in almost all commodities. We should come to a realisation that this commodity boom or boom were nothing but a corrective phase in which case markets will start selling off a tad. India will do a lot less than that because we have a lot of segment of the market which are not commodity exposed. So I think India will outperform, that does not mean we will sit out any global correction, we cannot.

source: Economictimes

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