The India Street Analysis
Rakesh Jhunjhunwala is undoubtedly the greatest Indian investor. He has been active in Indian stock markets for nearly 22 years now. He has seen the ups and downs at Dalal Street. His opinions have been vivid and most of the times he gets those right. The India Street attempts to analyze his opinions on US and Indian stock markets.
Recently he was interviewed by CNBC – TV18. We present below our views on his opinions.
Q: From morning we have heard a variety of views on subprime and what impact it could have on India and emerging markets. What’s your take on it?
A: I think the impact of the subprime crisis is going to be far worse than markets are expecting today. I do not think Fed rate cut can solve the subprime crisis; I do not think that the US housing market is going to bottom for the next 24-30 months. I think the US economy will further slow; anyway at the moment the markets are quite elated with the Fed rate cut. Let’s see what happens.
TIS View: We have maintained that ‘crisis’ is the best opportunity to enter the market. For example, during the US Sub-prime mortgage crisis, the BSE Sensex touched a low of 13780 on August 17 this year. On October 12, it has made a high of 18845 or nearly 5000 points in just less than two months! In our article cited above, we have said that the media finds reasons to justify the market movements. A good example was seen in May 2004 when the Sensex lost 1259 points (5487 was the high on May 13, 2004 and 4228 was the low on May 17, 2004) but the political change was being termed as a crisis on that occasion. Now Sensex has gained more than 4 times from 4228 without any change in political scenario.
The markets move technically and nothing can really solve any crisis. We do know that the exporters of goods and services in India are badly affected by the appreciating Indian rupee. However, Reserve Bank of India has not intervened to depreciate the rupee.
In India, the latest real estate IPO stocks have done reasonably well despite the crisis. Read more about it in “Review of select real estate sector stocks”. One might argue that it is just in the short term these stocks have gone up. But we believe that even in long term the stocks might provide decent returns since majority have good fundamentals.
We certainly can’t visualize other sectors like engineering, fast moving consumer goods, capital goods, consumer durables etc. getting affected by the so called US subprime mortgage crisis.
Q: You been bearish on US saying that the bull-run over there has ended. We saw how this bubble has burst, the whole housing market is gone into a slump, and US stocks are down. What is your take on it?
A: The US market has not slumped; the Dow is nearly at a new high. The markets are perceiving that this problem will be surmounted, just like all other problems.
TIS view: We do agree that the Dow Jones Industrial Average is at a new high. Techincally, it has even a higher target. The monthly chart of DJIA is shown below (Source: Yahoo! Finance)
The DJIA has been bullish on monthly charts. It closed at 42.84 in April 1932 and after 75 years, it is trading above 14000. One can watch the ascending triangle breakout in DJIA in the above chart. The triangle height is 4728 points and the technical target works out to 16637. Interestingly, the DJIA has broken the resistance after 6 years and 8 months – a good decline and consolidation period.
Q: You expect more Fed cuts to keep fueling the markets going forward?
A: I do not know what kind of Fed cuts will happen, because inflation also has to be looked at. But I do not think the Fed rate cuts can solve this problem.
TIS View: The interest rates are often being cited as a reason for market upmoves or corrections. While this may be partially true in the sense more money will flow into stock market because of the reduced interest rates, the major movements are due to technical and fundamental reasons. Also, we have seen in various articles about stocks that are pretty bearish even in this great bull market. We may think of it as a function of demand and supply gap; the more people want, the higher the price they wish to pay for the stock.
Q: Our Indian markets, or almost all emerging markets are clued on to what is happening over there (US). Because of that, we are seeing heavy volatility coming into the markets. If you take a look at the past three days also, there has been heavy volatility?
A: I would disagree. About two-two and half years ago, the Sensex first crossed the Dow and today the Sensex is at least 20% higher than the Dow, in numerical terms. So you may have day-to-day reactions, but over a period of time you will decouple.
TIS View: Basically, volatility arises due to profit booking at higher levels or so called ‘value buying’ at lower levels. This is true for short term, medium term as well as long term. When the crowd thinks they had enough and wish to book profits, certainly volatility will step in. Same is the case when the market participants feel that they need to enter the market at some stage.
Q: From a longish point of view, what is your take on the bull run in India?
A: I think the longer-term bull market in India is very much alive.
The factors driving the bull market are alive and kicking and will be present in India for a very long time to come. Having risen from 3,000 to 18,000, we can always be prepared for corrections or some fall. Markets may not even go up for maybe another year. But I do not think the bull market is dead. We had a rise from 3,000 to 18,000 and if we consolidate and do not go up for a year or two, I do not think it’s going to make any difference to the long-term bull market.
TIS View: We certainly agree. As far as the indices are concerned, the markets may consolidate for some period (it could even be years like the DJIA) before eventually they make their further upmove. Having said that, we have to wait for a technical confirmation before we conclude that the bull run has ended.
Q: Do you think we are going to consolidate from now on and then only progress further?
A: I do not know whether we will consolidate. But even if we were to consolidate and not go up much or go down a little, the longer-term bull market will still be alive.
TIS View: As discussed previously, we have to maintain that the bull market will continue in the absence of reliable and strong reversal signals. That way, we agree with this as of now.
Q: We heard Chris Wood say in the morning that the Sensex target, the long-term CLSA target, is 40,000. What is your take on that?
A: I can only have some idea of the directions; I have no targets.
TIS View: The term target is used to project possible price levels a stock or index might reach after a bullish or bearish breakout. When resistances are breached, new highs are formed; when supports are broken, new lows are formed. Currently the Sensex is at its life high and it depends whether decline/consolidation pattern occurs and further breakout on either side. Each person may have his or her own target, but the stock or index has its own target!
Q: You been bearish on Indian IT for quite sometime now. What could happen to the US economy? When we talked to the tech companies, they say fundamentals have not changed, rupee is the only problem. What is your take on that?
A: Fundamentals today might not have changed. But if there is a big slowdown in the US economy, which I personally anticipate, then I think software will also come under pressure.
Earlier, we had all tailwinds for the software industry and in my opinion we have headwinds now. I do not say that software companies are going to go down. Although volume may or may not get affected, margins will be affected and therefore price earnings ratios can be affected.
TIS View: We analyzed Infosys Technologies Limited previously and found that it was bearish for short as well as medium term. We also indicated that the market is probably concerned about exchange rates, for which the company has no control.
Currently, the market participants are not interested in majority of the software companies. But there is an exception, Rolta India Limited, which has gained 145.50% this year. Infosys has lost 13.92% since January 1, 2007, followed by Wipro 19.66%, TCS 12.97%, Polaris 32.58%, Rsystems 56.56%. So, though the rupee factor has influenced many of these software companies, Rolta stands out as the winner!
Q: Midcaps have been very tepid over the past one-month. Is it just like in the middle of the storm? How do you see them bounce back?
A: I disagree. Midcaps are doing exceedingly well. I think 50% of all listed stocks have made new highs. So I do not agree that they have been tepid.
TIS View: True in some cases. Our medium term pick Adani Enterprises gained 62.63%, Engineers India 35.57%, RCF 22.79% in September 2007. Some pharamceutical and software stocks have not performed all that well.