Tuesday, October 28, 2008
I am pasting the latest interview of Rakesh Jhunjhunwala,Shankar Sharma and Samir Arora.....
I will post my commnets lateron....
Here is a verbatim transcript of their interview on CNBC-TV18’s show Samvat 2065 anchored by Udayan Mukherjee. Also watch the accompanying videos.
Q: You have been the most circumspect. Do you think most of the damage is done or is there more to come you fear?
Sharma: All I can say is: this time, it (the financial situation) is truly different. So, even as it is a cliché, this is just something completely out of the realms of possibilities.
Q: Have you seen anything like this in your life?
Sharma: No, never. I hope I don’t see too much of this anymore. But that said, beginning of the year it did look like the bull market was drawing to a close. One had reasonably optimistic price targets in hindsight. My sense is that one is not done with this thing either here or globally. We will have rallies of the kind that we have seen intermediately over the last three or four months’ time although even a brief rally these days is very illusive.
The reason why I say that the pain is still not over and there is still downside is because I don’t see a revival of any of the factors that drove the last bull market any time in the next 12 months. It could be even longer — of course during the programme, I am sure each one of us will elaborate on those — and the chief problem that exists this time is the rise of the US dollar. That, at the very heart of it, is the reason why emerging markets will probably not come back as an asset class for quite a while to come. The reason why emerging markets did well was because the weak US dollar drove up commodity prices. That drove earnings in emerging markets in general, made a flight away from US dollars into non-US dollar assets. That tide has changed. The US dollar is back to being the safe haven, the reserve currency. That change is not going to reverse anytime soon. So one will see the euro weaken against the dollar. All emerging market currencies are very weak against the dollar. That’s the central problem. It’s not just about India or the BRIC countries. The larger problem for emerging markets is the strength of the US dollar.
Q: What do you think? How close are we to a bottom and even if you cannot answer that, do you think most of the pain in terms of price is done?
Jhunjhunwala: There was a Kaka (uncle) in the stock market in 1992. I told him: I am worried [at the way] the stocks are priced. They are not justified by the fundamentals. So he said: abhi sab funda ka mental hai. So let us not talk fundamentals. All values are an expression of opinion and all opinions are influenced by emotion and news, both on the downside and the upside. Just like at 21,000-22,000 levels, we felt it will never end. You had an occasion where Mr. (Mukesh) Ambani sold 5% of Reliance Petroleum shares. The Economic Times reported it, and even at that price, people were buying Reliance Petroleum at higher prices.
What's going to happen in the markets here is that we are going to go through three phases.
First is going to be a phase of stabilisation and it will be linked in a large part not to local but international factors. Then we will go through a phase of consolidation. Then, we will go through a new market. Also, I don’t understand how the dollar is defying gravity. The only way for housing to ease in America is to consumption to ease up. The only way the American economy can stabilise is by growing exports and with this value of the dollar, what will happen to American exports?
America also requires 6-7% current deficiency. Who is going to finance it and for what reason? How long will my driver say: put that money in a bank and the Indian government will invest in the US treasury for that person in America. So the dollar has to reverse, it is only a matter of time. As far as Indian fundamentals are concerned, I don’t know how worse or better they can get but to my judgment, we are best suited to face whatever problems arise, amongst the countries in the world.
I cannot make sense of the fact that five months ago, I was told a story on Bloomberg that it was confirmed that a Korean development bank is buying Lehman Brothers. Today, people are selling in Korea because the Korean banks have got USD 100 billion of debt that is coming up for renewal over the next 12 months guaranteed by the Korean government, which will not be renewed.
Therefore, these are phases in markets when you cannot talk sense. You just have to look at prices and the technical factors. You’ve got to look where world markets will stabilise.
What I can say is today the market went to a point because it gained 5% and it held. It gained another 5% on that. So, I think unless there are two or three days of successive gains in international markets, we are not going to stabilise.
Q: What is your take? I am sure events of the last couple of months would have come as a bit unexpected at least in terms of the price erosion. Do you think most of it is done?
Arora: Yes. [It is] totally surprising, [whatever happened in] the last few months. But my theory has been what Rakesh just said: this market will rise when it stops falling. I disagree a little bit with what Shankar’s point when he said it is an all-or-none situation. Even I agree that there is no logic for the US dollar to keep strengthening over time. But even if it did, the world does not come to an end.
If you see how the markets have been behaving in the last few months — it is as if they are supposed to go to zero, because there is a recession next month, next year or this year. Ultimately, things don’t go to zero. As of now, the markets would celebrate. As I said last time, just the reduction in volatility and just the fact that the markets don’t fall would be enough. So, right now when we look for optimism, we are just saying that if markets were to stabilise, we would get an environment where the world evaluates what India and other relative strengths of the world are. India is very well poised for it.
So, as of now we don’t have to revisit what the reasons for the previous bull run were, because it was something which made stocks go up five times. If, today, you tell an investor that you would just go back to September 30 market, which is effectively a 65% rally because the market has fallen about 40% this month — even if you say it could happen in three years — you could get all the money in the world.
So the point is: it just has to stop falling. Then I think there will be one sharp reversal and things would stabilise, but it may take long. But as fund managers, as current investors, nobody would mind that and that would be the seeds for a new run. You may not call it a bull run. But even if today, as Shankar said, you cannot read the last Bull Run for five years, it would be humongous returns from today.
So, the point is that we have fallen so sharply that even getting back a month ago would be a very significant appreciation in the market. That will start very soon one day because it cannot fall at the pace at which it has been falling.
Q: Before that process starts, do you expect more price erosion, even from 8,000 on the Sensex?
Sharma: Frankly speaking, that is no call to make because from 8,000 we could rally 10,000 conceivably and those could be very quick, very sharp, could be over in 10 days’ time. Those kinds of things will happen. If you are smart enough to play that, you will play that.
My sense is, looking at individual stocks, looking at the baskets of various stocks; I don’t see how telecom will ever come back to even 30% close to its highs. I don’t see how real estate will ever even double from these levels. I don’t see how infrastructure stocks like Jaiprakash Industries are even going to make their way back to Rs 150. I don’t see how Reliance Industries is going to go to Rs 3,200. I don’t see so many stocks based on a variety of factors, ever trading anywhere close to their highs.
So, therefore the probability of them even rallying 30% and sustaining is very slim because I am sure that view is generally just not my view. I don’t think a lot of people will disagree when I say that a Jaiprakash Industries, or a DLF, may or may not ever get back to even 100% higher prices. It means that the wave of selling might abate for a day or two, but will come back in all fury the moment you see some kind of uptick on prices. That will keep capping your gains. Whether we like it or not, that is really the way this market is. A lot of leverage money came into a lot of asset classes. That leverage is gone. It is going, it is being pulled out.
As it always happens, the asset class that did the best will be the one that gets hurt the most. So, in India, capital goods and banks did the best — you have seen how they have done lately in the last eight-nine months. Overall on a global basis, the BRIC countries did the best. You see exactly what has happened. US was the laggard market for the five years of the Bull Run, it has actually been a terrific outperformer, down only 33%. India is down about 65%, and most other BRIC countries are down about the same.
So, you can imagine that just being long US and short EMs (emerging markets), you made a 30% relative return. So, the whole legs from this bull market have been cut. Let’s make no mistake about it. We are not going to see the highs to this market for many years. The whole construct, the underpinnings of the market have to change. Newer players have to emerge; new sectors have to come up for that new next bull run to happen.
So, right now I’d be very happy with a 10% rally in the markets. Beyond that, I don’t think anything sustains.
Q: How long will it take in your eyes? You spoke about stabilisation and then consolidation – what are you resign to?
Jhunjhunwala: I want to make two observations. Markets in the world are facing an uncertainty they have not faced in the last couple of years. Markets don’t like uncertainty. We cannot keep, however, keep on extrapolating what's happened in the last 12 months into the next three years.
There is uncertainty worldwide about de-leverages but what gives me hope is that at these levels, we are pricing in at the worst. It all started from the housing market in America. The fact remains that August sales of existing homes have gone up 7%. September has gone up by 5%. New home stats in America have come down to 4.5 lakh. So I don’t see a total economic collapse in the world — a possibility to which I give a chance but a very slim one. We are pricing in some kind of global economic collapse and even if the growth worldwide next year is 2-2.5%, there is no degrowth. Markets will go up next year. Now I don’t know how the US dollar is strong in momentum and on the charts the US dollar. If it continues to remain strong, then God help us.
Q: How long will all this take? You have seen previous bear markets. Do you think this one will test us for a year or two even from here?
Arora: What I have always said is: it depends on how you define a bear market. Coming out of this, a 10% move in the next one year would not be a bear market in anybody’s mind because [there would only be] relief of tension from what is happening these days. Before that, the point is then you are buying stocks in the market; somebody is always selling them and you do not know why they are selling. Mostly they sell for information or because they have a view and sometimes they sell because they need liquidity. There is no other reason why somebody sells a stock.
Of course, you may say that today the amount of selling is too large and therefore I will wait for a month, to which I agree. So it has to be based on timing. I would say: if we all just define a 90-days-later view and go and buy this market independent of what the level is because this kind of de-leveraging if it has to happen; it has to happen over weeks and months. It cannot happen over quarters and years. That would be a good starting point.
But I do not like the idea of — of course you (points to the anchor) being the leader of this, when in a crowded theatre, [you are] shouting fire-fire even though you notice a fire at one end. But the fact is shouting fire, when it is not really needed, creates more death and stampede as we now know in India. So the point is everybody knows there is a problem but to think it is the end of the world, I do not think it is.
Q: But it is better that I cry fire rather than say good things like you did three months back and let people get into stocks and then burnt their houses, right?
Arora: That is true but the point is: to bring up every reason now is not really needed. Also the world does not get a free ride. We cannot have a free ride in this world that we will wait but we are all looking for confidence in the world so it is collective. Everybody is a participant in this market. We should not act as observers of this market. It is just that some people think for a few days that they are mere observers.
Q: I am not a participant in the market. My job is not to say good things when things are not good. I say it like it is.
Jhunjhunwala: We all say things as we perceive them and we have the right to do that.
Q: What is your observation on how long this 8,000-10,000 kind of range can last?
Sharma: This range has been the moving target. I think it was 3,800 to 4,200 on the Nifty then 3,600 to 3,800 and now it is like 2,500 to 2,800 and I am no big lover of trading ranges. The fact is that the whole construct of this bull market is gone. My sense is that the S&P 500 will reach 600, which I think is a 20-25% away or thereabouts. The Dow will easily breach where it was in October 2002. Within that context, India still does very well because India still is up about 2.5 times or 3 times on the index from where it started the bull run and average stock is still up substantially. I look at a stock like Unitech adjust over where everything was 0.60 paisa and now it is Rs 30-40. That is not bad returns in many standards.
There is still a lot of money on the table to be taken off — for investors on a number of stocks and that’s a real problem. The outperformer gives you so much returns that people can still sell in reasonable size and still lock in gains which relative to let us say US equities market still look very good. The average stock is up at least four-fove-six times on the good quality end in India. I mean a Bharti used to be a Rs-45 stock, it is now at Rs 550. That’s still serious gains for anybody.
So what I am saying is till that whole original bull market construct is completely taken out of the equation, I don’t think the new bull market starts. But within that, Samir is right — we could get a 10-20% rally. I don’t think that amounts to anything at in context of how much price damage and psychological damage this market has suffered. I don’t think we are out of the tunnel yet. We are barely, I reckon, 40-50% into the turn.
Jhunjhunwala: I cannot agree on that.
Q: Do you have the conviction to go out and buy today at 8,000?
Jhunjhunwala: I have bought today.
Q: What kind of sectors were you buying?
Jhunjhunwala: I can’t say what I bought. But I can tell you one thing. One cannot look at the S&P and Sensex in isolation. That from 2002, even in the base estimate that you gave me, the Sensex earnings are up 3.35 times. I don’t think the S&P earnings are up 3.25 from 2002.
They won’t even have doubled. So one cannot compare the S&P to the Sensex. You are comparing apple with peaches. Here the earnings have gone up 3.25 times, there the earnings have doubled.
Sharma: That is completely incorrect. It is the same global bull market pond that every market drinks from. Nobody stands out. The only way you can say it is an Indian bull market is when every market is down and India goes up 50%. Then I will agree with you. Otherwise it is a big global macro move.
Jhunjhunwala: Ultimately, whatever I have learnt in the markets is that markets are slaver for earnings. One is going to find stocks at one time earnings and one is not going to have consolidation, one is not going to have people who take takeovers. Because when I buy stocks, I am buying value, I am buying assets. So if you tell me one thing, if that history is going to change for prolonged periods of 10-15-years, stocks are not going to be slaver for earnings but are just going to be valued just on any basis because somebody has the need to sell and somebody is leveraged. History tells us, at some value, if somebody is leveraged, there emerges a buyer. So I cannot agree with you that one is going to have values just because Bharti has gone from Rs 50 to 550, which means that Bharti must come down. I don’t agree with that.
Sharma: That’s not my point. I am saying that for an investor who bought, he has still got enough gains.
Jhunjhunwala: So it must come down?
Sharma: Exactly because those are the places where you made the money. That’s the place where you are going to take the money off the table. That’s the way people react. They say okay this is still money in it.
Jhunjhunwala: I can get you the tape I heard you say — and I quoted you — that assets by equity by an asset class is one which trend upwards.
Sharma: Absolutely. But it doesn’t trend upwards every single day. US equities underperformed for 14 years, they didn’t go anywhere. India didn’t go anywhere for 10 years. We had a good run along with the rest of the world.
Jhunjhunwala: Indian economy is not in mid-ages, the Indian economy is just in its puberty. We are just into our teens.
Sharma: It doesn’t matter. What matters is that whether the environment is conducive to a global bull market or not. It is currently not. It was great during the last five years.
Jhunjhunwala: Let’s agree to disagree. Time will bear it out.
Q: Let me get a third party in then, since the two of you disagree. You were talking about de-leveraging etc, what's your sense…
Arora: I was saying that Shankar is criticising you much more than I did because he is basically saying that you are not needed. We should only watch CNBC-US because everything depends on the S&P. Everything is a global bull run and we should just be a multiple of S&P.
Sharma: That is the fact. You show me the data that disproves that, instead of giving opinions. Give me the data that tells me my bull market stands away from the global bull market.
Jhunjhunwala: I will give the data. There is a big parallel. In 1965, the Dow was 1,000 and the Nikkei was 4,000 in the same year. In 1989, the Dow was 2,000 and Nikkei reached 40,000. There are so many parallels.
Sharma: Let us talk about an economy like India which has just converged with the global economy. During the last 10 years, I don’t know of any six-month period in which India performed very differently from how the world was performing. That’s the reality, we have to admit it.
Q: What’s going on with the FII selling? When do you think that nears some kind of completion? What sense do you have sitting out there?
Arora: As of now we hear a lot about hedge funds selling which may be true but the only thing — which I said last time too — is that hedge funds normally get a much longer period. At least a two- or three-month period before everybody would get to sell. Therefore this kind of selling, I think, has to do with India-oriented country funds where the redemption periods are: you have one-day notice and need to pay within three days. Hedge fund may also sell because those guys are selling but I don’t think the driver of this kind of a fall would be hedge funds because normally it’s not that they have to sell within three-six days. Even we were much liquid in terms of our hedge funds; liquidity terms are redemption terms. We will have at least 45 days to sell at any point of time before an old redemption has to be paid out.
But in general I cannot say that this is FII selling independent of the fact that the world is selling. Therefore this argument that strategists are making about Indian rupee depreciating and India having some problem on the fiscal account — I do not think that is a real reason.
Right now, it is a dollar-driven reason because even against gold which would have the best fundamental in some sense the dollar has appreciated a lot. So we should not take everything on ourselves. Our problem is: as Indians, we tend to get a bit holier-than-thou. We have strategies to come on your channel and say, how India is overvalued against the world by 40% without differentiating that we did not close our market on any random day or just did not choose to bring some government in and say buy stocks or randomly lockup some CEOs of companies or fund managers and give them visas. If the world is not going to appreciate these differences, maybe we should also all do these things and close our markets for five days when the world doesn’t want to penalise such action.
My point is: the world is not an all-or-none. If you bought today and market fell 20% tomorrow, if you are buying only 1/10th of 1/5th of what you are supposes to buy in this period, it does not matter.
The point is that even everybody is a hedge fund manager. Nobody should think that he is an all-or-none guy. The point I a, saying before is it is in our collective benefit to give some benefit to what is happening around us and not to think that we will all wait but somebody else will buy and then we will buy. Everybody is a participant, every consumer is a participant, every channel viewer and newsreader is a participant. Because in the end, everybody will be influenced and affected by it.
Jhunjhunwala: I would like to add one point to what Samir said. From 14,000 to 21,000, I do not think there was a single day when the FII buying was negative. I think from 4,150-4,200 to 5,700 — to the day they banned the P-Notes, up till that day — everyday continuously bought and the story was you cannot leave India, every FII has to be in India.
So, with due respects to them, I don’t know what to make of their wisdom. What was the reason for them to buy at 21,000? What was the reason for them to sell at these levels? What are the factors that drive them? What I do know is that the factors that drive them ultimately reverse them. It had happened earlier; it happened at 21,000, it happened last year, it will happen this year. The value of (their) holdings is now estimated at about USD 60 billion. So if you see the total world market, where their assets are between USD 5 and 15 trillion, India is a small part of it.
Arora: We cannot talk about Shankar because he has been right most of this year and I totally appreciate that. But look at other people who come on your channel and look at what they have been saying about oil, (they said) oil was in shortage and it was going out of supply that there was one last Saudi Arabian field [remaining] in the world. With great conviction, everybody would come in and say the same things. Three months later, they come now and say [prices of] commodities are going down. Point is: you cannot be carried away totally by the moment and therefore obviously everybody has become cautious. We have not net 30 instead of 50-60 but the point is that you cannot walk away from this game. If you are in this — and that includes everybody who is watching your channel — they may portion 1/20th or 1/10th but to think that we will wait and everybody else will support us and buy us out is not going to happen.
Jhunjhunwala: Can I look at earnings in isolation of ROC (Return on Capital) and ROEs (Return on Equity); earnings are not a mathematical figure.
Q: You are going on a different tangent.
Jhunjhunwala: No. India is cheap and when I compare India and Korea. If the return on capital in Japan is 3%, return on capital in India is 20% I can’t equalise PEs there from here. Today, if our long bond is 8% and we had 10 times the current year’s earning; the index is getting better yield in the long run.
Q: What if earnings fall 25% next year?
Jhunjhunwala: That’s the uncertainty. Who knows whether they will. Nobody can say that with certainty. That’s why I am saying you are pricing out. If the global economies collapse, they could.
Q: Do you think they will?
Jhunjhunwala: I am positively optimistic, they will not.
Q: In no de-growth at all next year?
Jhunjhunwala: Not 25%
Arora: We say that stocks represent present value of future dividends and future earnings and then we look at one-year earnings in a very distressed environment. Even if it is down 10% and therefore price everything of that that what happens when earnings are down. Beyond a point, people say that earnings have not yet been reduced but the market has fallen 65%. So you mean to say all this happened without the market taking a view on earnings? It is all simultaneously happening.
There are many times in the world when bad news takes a stock up because that it the way it works. Now what Shankar was saying that the dollar because it will strengthen therefore the rest of the world will be bad, well then you could kiss goodbye to (Pepsi CEO) Indra Nooyi being the most powerful woman. She became powerful because she was running a multinational where she made all the money from a weak dollar. In the end, these are all self-correcting mechanisms. You will never have all or none.
All over, the world will not choose to have it like that. In the end, the world will not be confident enough to bet on only one factor even if it is the factor that happens but right now because there is a process of redemptions or whatever is that new word — de-leveraging — so it may take its course. Therefore you wait 20-30 days independent of what the price is and then by that time either it is the end of the world or this process would have taken us to zero or the de-leveraging would be over.
There may still be an overhang because in future people may not take the same amount of leverage but that is as if we want last year’s returns. You have to have returns in the environment in which you operate. Right now, for the next three months, if somebody told me the market will not fall and will not go up and will be effectively closed down, I will be the happiest guy in the world.
Sharma: My point is straightforward. In a lot of cases, what was the market cap of companies six-seven years back is equal to their interest outflows now. A lot of these companies are based on commodities and cyclicals. I consider infrastructure to also be a cyclical because it thrives in eras of cheap capital and cheap money which is what we saw in the last five-years. Jaiprakash Industries’ market cap was lower than the interest it pays now.
Q: Why do you single that stock out for punishment like it won’t go up?
Sharma: You should be asking Samir that.
Q: Samir sold out of it long back I am sure. Samir, didn’t you?
Arora: Yes, long back.
Sharma: He is the original finder of the downswing. But my point is that a lot of companies have built up huge balance sheet risks in India. We did exactly the same thing in the ’90s by putting up capex. This time we have done capex or acquisition which is the same thing as capex.
That is my real fear that you have so many good blue-chip names who have gone out, bid for companies at crazy prices. That is all setting on the balance sheets. So I do not really pay too much attention to these earnings estimates of the Sensex. That is an absurdity, which should be banned outright.
You are drawing an Rs-850 EPS across the bank, auto company, infrastructure company, steel company, two-wheeler company saying 850 times ten should be 8,500, ten times P/E across all industry including Hindustan Unilever, Infosys Technologies, Ranbaxy — that is complete absurdity.
Jhunjhunwala: So finally earnings will matter.
Sharma: Of course they matter. But they matter on a disaggregated and sectoral basis not drawing a line through all kinds of businesses and putting a common P/E to everything.
Coming back to the point, it is that companies have built a very significant risk on their balance sheet and no matter how emotional Rakesh Jhunjhunwala and Samir Arora get about the bull market — and Samir is so right that we are not neutral observers, I am not a neutral observer, I am a participant and I benefit from bull market as much as Samir or Rakesh do, let’s make that caveat clear.
But that said, you cannot ignore the hard facts that our companies today have greater balance sheet risks and in a lot of cases they have built these risks at pretty high levels of financing. Done at a time with a dollar-rupee was…
Jhunjhunwala: (Interrupts) From the 30 companies on the Sensex, I do not think more than five companies carry disproportionate debt-equity ratio.
Sharma: Correct. And they have been the companies that have actually done very well in terms of earnings. The companies that did not do well in terms of earnings have not done anything at all.
Jhunjhunwala: Infosys has done well in full cash.
Q: What names do you have in mind when you say disproportionately large?
Sharma: Some of the steel and auto companies and they have gone and done transactions which did seem very risky.
Q: Tata Steel, Suzlon?
Jhunjhunwala: That is what I am saying. Tata Steel, Tata Motors, some of the real estate companies, Hindalco, maybe even Suzlon. I do not remember more than five companies out of the 30-share Sensex and I cannot say that all the technology companies are in cash.
I do not think Reliance Industries has got any problem with liquidity, I do not think infrastructure has got any problem, any of Reliance Group companies.
Sharma: Infrastructure companies have got a lot of liquidity problems.
Jhunjhunwala: There will be certain companies but I cannot generalise that the debt-equity ratio within companies may be at all-time lows.
Sharma: Therefore the fact of the matter is that when you have gone and built up capacities, [increased] infrastructure spending, you have done without caring too much about what price and return that you are going to make on them. That in the downswing will get you hurt.
You do need to spend time marking time in this market. You cannot build a case for the resumption even if the earnings are not falling 25% in FY10, although to be honest, I do not believe that they will rise 10% in FY10. Looking at the history, last many years have had negative earnings growth. My sense is that you are still a long way away from calling the bottom to this market at least in terms of earnings momentum. Till that comes back, I agree with Rakesh Jhunjhunwala that you need earnings momentum to come back for the market to revive but I do not think that comes back that easily and that soon.
Jhunjhunwala: Warren Buffet wrote in his letter — I do not know he is right in saying it — that whether we should buy stocks or not but markets bottom far before the economy bottoms. That has been the history. I do not if everything in history is going to be turned around this time.
Q: But have they bottomed even before economies have started falling which is the case perhaps now? Only single market in the West has gone into recession, the others are still not entered into this?
Jhunjhunwala: Today, you are pricing in the recession. There could be a period of three to six months where the economies may not bottom out or maybe nine to 18 months. But whatever valuations you have today is because you are pricing in the future.
Nobody knows to what extent you will go around. But to say that Bharti is at Rs 550 so there is a long way to go down or because the stocks are not going to respond to earnings — I can say that in the index of 4,200 in 1992 — I think Hindustan Unilever was Rs 200. When the markets made a bottom, Hindustan Unlever was Rs 3,290.
So it is not that stocks will not gain. I think that corporate India is highly over-debted. There are certain companies but they do not represent the general companies. They have been punished and punished severely.
Hindalco today has a market cap which is less than what it raised in the right issue.
Arora: If the market is not pricing in the fall in economy and growth rates and explain independent of this leveraging world only, why have our markets fallen 45% this month? It is obvious that there are things being discounted. They may get over-discounted or not enough but to say now I will see some GDP number and therefore that will be another round of 30-40% because that is what happens when recession turns up in UK or somewhere else, I think we are doing it simultaneously.
At the end of the day, the alternatives have also to be seen: what else is the world — not in India but in the world — going into. Everybody is not going to keep their money in their bank because which bank they will put it in? If they actually put money in their bank in dollars, that means the banking problem is over.
So at the end of the day, it is all a choice between various markets.
Sharma: Which is why HSBC ran out of account opening forms in London.
Arora: State Bank of India also ran out of forms, these will happen for a few days or weeks. Whatever you may say, if there is a 20-year pension issue, that fellow will not — to save his job — say I am putting money in the bank and on a day one therefore, immediately take a hit in what he will accrue. They will still take all those bets. That is how life works.
So after it settles, the point is which market, which country has better opportunities or has fallen the same as other markets without having exactly the same problems. If India had in this fall fallen less then you could have said that India is already getting rewarded for it. Now a market that closes down, and a market which is open and a market which has restrictions — L&T (Larsen & Toubro) disappointed the market and disappointed us too but had a 32% earnings growth. Show me another stock in Russia or Asia where somebody went up 32% and then you say whether it is discounted or not.
The fact that that we have 40-50-20% earnings growth, half the world does not have. People talk about price-to-book, please show the book in the US banks.
Q: Fair point but it is still sad that L&T is at Rs 700 and languishing.
Arora: I agree. I am saying therefore when everything stabilises, the world will choose those markets, those countries, those companies where independent of the problem — there was this extra thing that the companies are performing well but they got hit as much as everybody else. Therefore after a month or two, when the whole world is fallen the same percent — nowadays everyone falls the same, plus or minus here and there but does everybody — everybody will put it together and choose what they like and in that case India has a very good chance.
Jhunjhunwala: Gold has fallen 35%. USD 1,035 per ounce was the top. Yesterday, I saw gold has gone to USD USD 680 per ounce.
Arora: Whether it is Russia, Korea, Taiwan, it cannot be that the world will suddenly say: no, I am going to keep my money in HSBC because that cannot be the trade of the whole world.
Q: Let us talk about the guy in India. He might not have such an international perspective. Has it come to the point where people can say at 8,000 Sensex if I put in money, I will get reasonably high chances of getting more than FD returns over a one-year period? Can you take that call today?
Sharma: The market has gone from being a buy-and-hold market to being a trading market. That’s the characteristic of bear markets that you do get very sharp — in fact one can probably and I still do believe that there is one big rally in this market that will going surprise us — which will make it look almost as if we are back into the bull market territory.
Q: 15,000-16,000 kind of rally?
Sharma: To be honest, my initial target was that from 10,000, it would rally to 15,000. In hindsight, it was too optimistic. Now it could well do down to 6,000 or 7,000 and rally from there to 12,500 which is where we were last month or may be the beginning of this month. So there is one big rally in there. This is not going to be a buy-and-hold market. This is going to change its colours, its strips and become a trading market. Timed right, he (the buyer) is definitely going to beat the returns of 10.5% or 11% of the FDs. Timed wrong, he is going to lose everything. My sense is that FDs and FMPs are in problems of their own. But good solid FD at 10.5% looks really attractive and if you lock it in right now because obviously the cycle is turning, I think one is good shape. I am just talking from a pure retail investor’s perspective, not a professional investor who can be a fleeter foot.
Q: Same question to you Samir. You have always spoken about asset allocation. It has not worked this year for equities. Do you think from a one-year perspective you can take that call and be right from these beaten down levels?
Arora: If you put in the investment average over the next three months starting tomorrow than one month later, then yes, you will do better than fixed income.
Q: Why do you keep saying those 30-days, 60-days, 90-days? Is it because you believe there is more to come?
Arora: As I told you my view is that in terms of timing — because the pace of the momentum is strong — either it blows itself out and everything is over and India goes to 1,500 or 2,000 or this de-leveraging-led redemption of forced selling. The pace is such that it can go on for five days, who is to say? But it cannot go on for 90-days. That’s what I am trying to say. That it will either end because you fall so much or the pressures would be off because the end-investors would say there is no point in selling at this point and may give you not a one-year window but may give you a few months window saying: okay I will redeem after six to nine months. Then you have that.
The point is that right now the selling is not happening, normally most cases because the fund manager has a very negative view on Reliance knowing that one week ago, Mr. Ambani bought it at USD 3.6 billion or because Warren Buffet says — and I don’t agree but because that poor guy has a redemption. So once you let that go off for a minute either because the market has gone down a lot or his desire to raise money is over, you will have that rebound which Shankar talks, after which again there will be frustrated sellers, pent-up selling demand and that may make the market trade sideways or plus-minus a little bit. But that first round we are not sure when it ends.
Jhunjhunwala: What I personally feel is I cannot say whether he should put it now but two factors which should dramatically improve the atmosphere for Indian equity are: one is interest rates are headed nowhere but down. In my calculation — and I have studied the WPI index — one is going to have between 5.5-6% inflation by March and interest is one of the biggest factor in valuing assets.
So when interest is going to go down, that will give a kick to equities. Secondly, one year ago, nobody was bothered about India’s monetary and fiscal position and the only joker in the pack was oil. With oil being down and I am not seeing any recovery for oil, India’s monetary and fiscal position and foreign-exchange position next year will dramatically improve. These are two factors which could drive up valuations in India.
We are pricing in some of the corrections in earnings already into next year. I am personally bullish on the ability of the Indian economy to grow. Indian economy is in its teens. Having said that, I must warn I have been wrong about the last leg of the markets. So please take whatever I say with a pinch of salt. But I wouldn’t say that for the next one year, but if one has two- to three-year horizon, I am quite confident with interest rates coming down, India’s macro position improving equity is going to give a much higher return.
Monday, October 27, 2008
The destruction has already happened and market world over may even go lower from here but how much it can go is nobody's guess.
Those who said that below 10,000 sensex for Indian market also went wrong.As we are at sub 9k levels.
So there is no sanity now seen.
Vallabh Bhansali has very very rightly written about our market.It is a real cracker if one understands his whole view and what he is telling.His interview says many things.
But the Silver lining I am seeing is as under:
1)Crude is going down.
2)Commodities is going down.
3)Inflation is and will go down
4)Int rate will go down......
These are all necessary ingradients for next bull run.
Among the above, first 2 will be due to demand distruction......world over and that is going to be a big big trigger in next year for our market.We will atleast grow at 6% GDP and if the above happens which will then we can touch 10% GDP by 2010-1011..
It is anybodies guess that when Crude comes down from $146 to $60 and even less the things will get cheaper.Commodities is down that will add to the bottomline of the earnings.
Inflation is related to Crude and commodities.
Int Rate has to come down if inflation is going down.No one is going to borrow at high Int rate when there is no business.
So we in India should be back to where we started in 2003 where inflation was 4-5% and Int rate were below 6%.That is going to be the NEXT LAUNCHING PAD FOR THE NEXT BULL MARKET THAT WILL TAKE PLACE.
And remember friends, market discounts all these much earlier then lay investors could understand.
I think will see a good turn around after June 2009.......
Sunday, October 26, 2008
I am pasting here an interview which I read at Moneycontrol.com
Hope readers will get enlightened by it while reading it and trying to read the finer lines which I had highlighted......
Vallabh Bhansali, Chairman, Enam Financial believes that the massive sell-off seen is mainly due to panic and not due to fundamentals. He advises investors not to panic, wait on the sidelines, and not sell unless they have to. "This is not a regular market, but an auction market and people must understand this clearly. Today, those who are desperate for cash because they fear redemption or have redemptions are forced to sell. Those who do not have any reason to raise cash should not try and value their stocks based on the prices that they are seeing today."
Bhansali said the world is going into recession and demand is shrinking but stock prices have shrunken a lot further. "People are hurting themselves by panicking beyond reason whether it is fixed maturity plans, stocks, or other asset classes."
Here is a verbatim transcript of the exclusive interview with Vallabh Bhansali on CNBC-TV18. Also watch the accompanying video.
Q: In your career have you seen a day like this, a more than 1000 points drop on the Sensex with absolutely no big evident trigger?
A: I have not seen anything like this. I have been in the ring when the market fell 15-20% but there was never as much panic as there has been today. Normally we would have the circuit filter but because of technical reasons, the filter is higher. Fortunately, the market did not close.
This is unprecedented because this has been accompanied by bloodshed around the world, this is terrible.
Q: What you ascribe this to – everyone has been broadly swiping this under the global situation but there really was no key trigger today. We have been through worst situations when it comes to the credit crunch in the past two-four weeks, is it just an excess of fear in the system?
A: There are two aspects to this; one is this is not a regular market. This is an auction market and people must understand this very clearly. Today those who are desperate for cash because they fear redemption or have redemptions are forced to sell. Those who do not have any reason to raise cash should not try and value their stocks based on the prices that they are seeing today. This is very important because someone who is desperate for a glass of water will take off his diamond ring and exchange it for water. Those who do not have to should not look at that as any establishment of price either of that water or for that drink.
Secondly, to the extent that the stock exchange is a leading indicator of things to come, the market is probably scaling down earnings forecast for 2009 and even 2010. But the most important thing for the investors to see is the prices. Prices of 80% of the stocks are down at least 70%, 60% of the stocks are down 80% from their peak. 1930 has already been built into this price. People are imagining 1930; no one sane is alive today to tell us about what exactly happened in 1930. ( This I have been writing many times here that no one knows what happened in 1930 and the situtaion was different) India has no case to experience 1930. So except for those people who have to sell under compulsions should just wait on the sidelines and interpret the prices in any manner.
Q: It was a very brave word, but when you are sitting there watching your portfolio decline by value like today it did by 30-50% how can you not – and the news seems to be only getting worse. There is a lot of rumour mongering on the mutual fund side and we have heard all kinds of regulatory noises about the FMP (fixed maturity plan) system and how they want more disclosures, how that could potentially be ridiculous exposure of FMP mutual funds to the real estate market, how long is this going to last? Where do you stop being fearful?
A: There is something very strange and sad that is happening — those who took a twelve month call and bought into FMPs are now trying to review their portfolio on a 15 day or a one month basis. You will create a run on any bank if you try and break your fixed deposit and demand money, I think some of that is happening.
Mutual fund schemes had exposures to real estate companies and some of them – we heard about one company defaulting yesterday there would be some panic. But I wish mutual fund industry would come out and put up a white paper on what exactly is happening because that would probably staunch the panic lot more then letting people imagine. I think while there is no denying whether the world is going into recession and there is demand shrinking but the prices have shrunken lot further, people are hurting themselves by panicking beyond the reason whether it is FMPs whether it is stocks or whether it is other asset classes.
Q: What is your assessment of how badly of the mutual fund industry especially the FMP portion is when it comes to its exposure to real estate and how much worse could the whole redemption pressure get and therefore what kind of collateral impact it could have on the markets?
A: Promoters, the government and institutions hold 80-85% of the total holdings, a very small portion is held by retail at large and that is probably a few USD 100 billion. The same is the case with the amount of assets held in the mutual funds by retail investors and that would be a few thousand crores.
So if I were to put this into perspective; of the total wealth of the country, this is not a large amount. Today we have the Finance Minister (FM) who is monitoring this situation twenty-four hours, he has virtually become an anchor person on media channels, he is assuring people everyday – given the situation, I think the moment there is something that can be tackled I am sure the Reserve Bank of India (RBI) and the ministry will tackle it very adequately.
Q: Are you saying that you are not worried about the FMP and the larger mutual fund exposure to the real estate industry and you do not think it will have a dramatic impact on the markets if things go worsen from here onwards?
A: Whole point is stampede is caused not by causes as much as by panic. Today you are seeing a stampede. What I am urging the ministry and the mutual fund industry particularly is to come out openly and explain that and then we can have a solution. Unfortunately, today that is not happening. I am not fully aware of the reason why that is not happening but clearly if some of the banks in Europe, particularly, went to the government and said they had trouble they would be nationalized, get protection and things could be handled a lot better. Depositors would then not have panic.
There has been trouble; but my guess is that of the total assets held under the FMP schemes, the amount that could be exposed to real estate could be really in trouble and cannot be that large as to cause a panic all around. That will damage our economy unnecessarily.
Q: We do have news from Sebi that it has asked for more disclosures on FMP allocation, so hopefully that will help straighten out that system, but while talking about regulatory action we also saw Sebi come out this week and clamp down on practice of overseas lending of stocks that were underlying assets to P-notes. Do you in your assessment think that will help reduce the short positions in this market and therefore help shore the market up?
A: Today given the enormity of the challenge that any regulator is facing. One is not sure as to what results one would get from a particular action. But if one realizes that in these troubled waters, you cannot allow people who are sitting on the sidelines to fish. I think it’s absolutely alright to take whatever action based on data that any regulator would have. We have seen that around the world.
The whole point is not to come in the way of short seller, when you have a regular market or don’t have a regular market. I don’t think one can take a classical view about it. I am the last person who would ever say stop the short-seller but today you are not seeing a regular market and therefore if you had to take emergency action based on data, based on transparency as to when these things will reverse, under what conditions, I am not so averse to considering such action.
Q: The Monetary Policy that took place was a completely inactive or non-action policy as many are calling it. Were you disappointed, do you think either this stance of the RBI could have been more reassuring towards the current market situation or should they have taken more action when it comes to either liquidity measures or reducing interest rates?
A: The RBI has almost made it a habit to come out with the monetary policy a few days or a week before the actual date. So I think lot of action took place already. I did not expect any particular action. I think today’s (October 24, 2008) meltdown was more in response to what was happening in Asia and early opening of Europe than monetary policy.
So I think the RBI did quite a lot in the last few days or a week or so. I would urge the Sebi (Securities and Exchange Board of India) to temporarily lift all limits on promoter holdings whether it is buyback, whether it is open offers, whether it is creeping up position for the next two-three months. I think companies and the shareholders are bleeding because of this panic selling. What actually is happening is that of the total hedge fund industry, which is of USD 2.5 trillion; exposure to India of all FIIs (Foreign Institutional Investors) hedge funds put together is somewhere between USD 50-60 billion. Out of this USD 5-6 billion of panic selling can ruin this market for a long time to come. So I think today those promoters who have cash and who want to buy in the market should be permitted to do that. This is something that is within Sebi’s powers and I would urge it to take drastic action on this front.(Does this mean Vallabh Bhansali has blasted SEBI or Fin Ministry? he need not write this ? or should come out and appreciate SEBI or Fin Min when these steps are taken?)
Q: Do you think that will help provide some sort of support to many of these stocks that are falling especially blue-chip stocks because many of the promoters we hear also are either out of cash and may have had to pledge their previous shares to be able to raise money to either subscribe to some sort of previously subscribe to warrants or things like that or many promoters do not want to buy because everyday prices are going down by 10-30%?
A: We are doing a number of buyback offers and going to several clients to tell them to come and support their shares if the creeping limits are open.
Today the stocks are available at 30-40% of replacement cost. I can assure you we will continue to breed children, we will marry, build homes, educate and the economy will be absolutely normal, we will grow at at least 5-6% for next two years. Our stocks are cheap based on any valuation and people must understand that.
Q: Do you expect any kind of direct government intervention or even indirect government intervention in these markets and any kind of Sovereign fund that the government might set up to help shore up levels in this market or to create some sort of reassurance- I am talking in vague terms because it is a vague idea but you think it could extend to reality?A: I don’t think it’s impossible. This country has shown the capability to pledge its gold, to swim differently from rest of the world in Asian crisis, so I would not rule that out.
But what the government can do more easily is to give relief on dividend distribution tax, on STT, reinterpret the capital gains tax, so at least those long-term investors who were driven out by short-term speculation in the last November-December-January period, those strong hands will be strengthened by those measures.(Another case in point.....)
Q: What form could this sovereign or market intervention fund take?
A: It could be done in two methods. Hong Kong sometime back created a USD 16 billion fund to stem the rot. This was during the Asian crisis. They came forward to do that and made a huge amount of money doing that. So, you could say that you are going to buy certain good stocks. The financial sector, for example, is one good place to begin and they could do that.
They could also put a floor on the Sensex or Nifty. They say alright here we have a huge position very similar to what Warren Buffet did. He bought 2018 Dow Jones saying that look I take a bet that the Dow Jones will not go below that, so it requires some imagination because it is beyond current regulations. One doesn't have to worry about regulations, but given our exchange reserve, the time is to use all of that.
Q: How long is this pain going to last? Where do you think this market could potentially find its bottom?
A: The USD 2 billion or USD 3 billion of stocks held by the hedge funds are loosing value much faster than the Sensex. Some of the stocks are falling about 20% to 25% and there is a huge amount of capitulation. Some of these hedge funds may go bankrupt or they will have sold out without damaging the overall market. Over a period these hedge funds will be bailed out or they will go to some different route in the world, one doesn’t know.
A lot of this troubled is borrowed and it is not home grown. We are very close on putting a cap on all these problems it’s a matter of few weeks according to me and not a few months that you are going to see the world come to some kind of order that all the regulatory affairs will be ahead of the curve, they started late but they are constantly pressing ahead to get the curve of the problem and I hope that in a few weeks we will be ahead of the curve.
Q: Fundamentally the economic data across the world is looking like it will at take least 6-8-12 months for there to be any positive news, is that how long it will take for our markets also to find a bottom and stabilize?
A: Stock market is a leading factor; which means it discounts things way before those causes appear.( That I have reiterated many times here) You will see economic data become adverse for several months but it is all got built into prices, when 80% of the stocks are down its already discounted in the prices. Investors often forgot to look at prices. They looked for justifications when the index was at 20,000 and yet again trying to look for justification when the index is around 8,000. Please don’t look for justifications and just look at the prices. I could give you hundreds of examples that the stocks have already discounted all the trouble that will get recorded over the next few months is all done.
Ravi alias Deepak alias Shankar Sharma! ,I hope either you are Shankar Sharma himself as I see no reason for you to get perturbed when I write anything against anyone.Remember there are many blogs where these chartist and analyst are lamblasted like anything.
How SS feels is not the readers business and tell me what I should do and explain me what I need to do.Let SS himself come here and tell me what he wants from me and whether I should appreciate him or not?Why you become the judge?It is just like you yourself is SS and asking for that! Is it so?Shankar Sharma visiting my site?That is great...for me......Lol.....
I have kept my blog open for readers to write commnets where many blog has no such tabs but that doesn't mean they become impolite to me.....If you do not like me or say hate me.....please stop reading me, that's all......
Thursday, October 16, 2008
I wrote here and also at somewhere else that CRR hikes in recents months were useless and actually it boomranged!I also wrote there that RBI governor should not take steps that he learned in Colloge and what he read in text book.There are instances where one have to think above that and that is why he is RBI governor....and that is what SS has said....in the question I have highlighted in RED and BLUE words.... Sometimes I feel that ... a noneconomics(Like me...Lol.) person read things much better then who has learned in college because a economics scholar will always go by book while the non-economics will try to find new ways to deal with situation......
Copy of what I wrote at other forum!
"It is surprising to note that SS is........ using the same word I used....."going by text book!"
What a coincidence!Some times I feel a non economics( like me...LOL...) can see much better then an economics scholar!
Isliye,kyon ki uske ankh pe economics padha uski patti badhi hai........he can't imagine outside that.......while being an RBI governor he needs and supposed to think outside that periphera.......but he failed miserably...I feel myself elated when I see a seasoned MBA like SS concurring with my view...what else I need....this appreciation is enough......I need not a pat on my back.....from....
Shankar Sharma of First Global said poor IIP numbers and a sell-off in metals is the beginning of a sharp correction. "Newsflows are still poor. The markets have still not bottomed out. We don't see the Sensex rising beyond 12,500 in the current move and expect a further downside in October. The Sensex could head back to 10,000 levels, and may even dip below that."
According to Sharma, markets won't re-conquer fresh highs in the next three years. "The environment in equities is likely to be tough over the next few years. The situation in the US is getting worse. The S&P 500 could dip to 600 levels. We see a 40% downside in emerging market equities."
On the rupee, he said the rupee is also not secure at current levels, and may test new lows. "Even if emerging markets stabilize, currency problems will worsen the impact."
He feels RBI's last few CRR hikes may have been excessive. On liquidity, Sharma said India had a lot of liquidity but it was sucked out by RBI. "The central bank may be slightly behind the curve in freeing liquidity. Sentiment in market has soured, so fresh liquidity may not work. The Monetary Policy may not change the course of downward trend."
Here is a verbatim transcript of the exclusive interview with Shankar Sharma on CNBC-TV18. Also watch the accompanying video.
Q: Your targets for the year got hit last week. Do you still expect lower levels from here or do you think we have hit some kind of a bottom?
A: The real problem is that while we did have a target of 10,000 at the beginning of the year, it is a target that you would be happy to get wrong rather than get right. The Sensex at 10,000 means that everybody gets hit whether it is a bull or a bear. The fact of the matter is the aggregate community of financial services get hit, the whole economy gets hit.
So, there is no great pleasure in seeing the target get achieved. That said, our view remains that – the first part of any market’s move is almost always dictated by what is just presently visible. What was visible that India was just going into a small slowdown from 9% GDP to maybe 7.5-8%, and the world was hit but not that badly hit.
Back in May or June, whilst at least our view was that one or two banks would go belly-up, there was by no means our view that there would be a mass scale decimation on Wall Street and Main Street banks like Wachovia or Washington Mutual.
So, you see when the markets go into a certain bear market territory, a new fact emerges, which can only buttress the fact that the original move of the market was correct, and it started selling off before much of the bad news was visible. Once the bad news has continually gotten worse, the markets have continued selling off.
As we stand right now, I cannot understand how the US gets out of the kind of mess it is in, or how for that matter Europe gets out of the mess it is in. Asia is getting into one slowly but surely. You have Singapore in a technical recession, you have New Zealand in recession, you have Australia in big trouble. Australia has exactly the same characteristics as the UK or the US – big property bubble. So, pretty much the same kind of venom exists there.
The UK is in deep trouble, Eurozone banking system is all shot to hell. You have banks like Deutsche et cetera still between 45 and 50 times leverage on tangible networth. Banks like Barclays that have gone and bravely bought Lehman Brothers but then on the backside they go and seek financing from the Bank of England.
I don’t see the landscape changing at all for the better. You have a country like Iceland going completely bankrupt. In the US, based on whatever we have heard a lot of problems still exist on the Lehman Brothers CDS’. So, it is all those factors.
Coming home, you have had terrible IIP numbers coming in from our own companies. You saw the metal pack sell-off today. I think that is just the beginning of a big correction downwards in metals. It started a little while back, and that is something we need to be very clear about that how can the whole world be experiencing a slowdown and steel and iron ore companies record profits.
I don’t see how the new bad news has abated. In fact if anything the world looks a lot more bleak than it did back in January. Much as I would want to see that the market has bottomed out, I don’t think that case can be made just yet.
Q: How much would you give the current pullback, given the regulatory action that you have seen in the last 48-72 hours? Can you play for a couple of thousand points more on the Sensex, or do you think that is being optimistic?
A: That is being terribly optimistic. I wouldn’t say with any degree of conviction that the market can go beyond 12,500. I think that is the absolute top. I doubt if it will get there, in this move itself, looking at the way the price action happened today.
This was on the back of a pretty strong Asia rally, and even as we speak, Europe has been holding up quite well. Despite that, India kind of decoupled strangely enough for the first time in a couple of months because India has generally been one of the relative better performers. Even though it has been down, it has been down a lot less than others say a Brazil or a Russia, in the last leg of the bear market. This was a big disconnect move. The rest of the markets were quite okay. But India sold off, and that is not again a good sign.
So, I doubt if the market can make its way beyond 12,400 or 12,500, if at all it can make its way back to even that level.
Q: Do you think in the next few weeks, the market will try and hold a bit of a range between 10,000 and 12,500 or are you seeing substantially lower than 10,000 levels even in 2008?
A: This range is a pretty weird thing. I don’t understand why people keep talking about trading ranges. Everything is a trading range from 3,000 and 21,000 would have been a trading range. So, the fact is that the markets are headed lower in our view.
My sense is October is not over yet, and October is a cruel month. In our view in September was that October would really be a cruel month. So, far that has not changed.
Our take is you will probably again go back to levels closer to 10,000 or probably a tad lower than that, because if you think about it, and view it in context, our basic broad theme this year has been to be long US equities and short emerging markets. The trade has actually worked very well, and more so if you account for the currency, where the dollar has completely decimated all other currencies including the euro, the riyal or the rupee, and the Aussie dollar, except the yen. Other than that, all other currencies have weakened markedly. So, US equities have actually outperformed significantly this year.
They are still down about 30-35% for the year while the rest of the markets are down about 55-60%, and more if you look at their own currencies.
Therefore, if you think about it, the US situation keeps getting worse. Companies like GE are in deep trouble. Obviously mainstream banks are in no good shape. Investment banks whatever are remaining are very shaky. I doubt if Warren Buffett’s USD 115 call option will ever get exercised because I doubt if Goldman Sachs would go back to USD 115 any time soon.
So, my target on the S&P 500 is probably 650 or maybe 600, which is lower than where it was in 2001. So, if you think about it, it is a good 30% away or thereabouts.
If EMs underperform then that means you are looking at about a 40% downside to general EM equities. If you just go straight by that analysis, you are looking at substantial downsides overall for the entire emerging market pack, not just India, but if you take a Brazil or Russia or a China or India or Mexico. We think that there is still pretty substantial downside merely based on the fact that we think the US is still headed lower, and US would still outperform other markets, despite being headed lower. Therefore, other markets would go down more than what the US is going down.
So, it could be a combination of two things. In absolute price terms we go down lower, or we may go down by let’s say 20% and the currency does the rest because the rupee by no means is secure at 48-49 to a dollar. I think it will take out its lows quite comfortably. So, a combination of price action and currency will mean that we will go down 30% from here in dollar terms.
Q: Last time I spoke to you, you were saying that we will go to probably 10,000 but you didn’t see the Sensex at 8,000-9,000 and that was unlikely in your eyes. Do you think the way events have unfolded; those scenarios could also turn true?
A: You can make a forecast based on what is reasonably visible. You cannot jump too far ahead of the curve. But clearly the last one month’s events, although by no means were completely unforeseeable. The fact is the ferocity of the problems, and that especially happened after the Lehman bankruptcy, with the entire freeze in the credit market globally and the liquidity squeeze back in India, which has had no problems of the kind that the west is experiencing, but our liquidity - prices seem to be pretty significant.
And just looking at price action you see the market doesn’t even hold an intraday rally. That is telling you that 10,300 or wherever we reached last week is not absolutely set in stone that it doesn’t get violated. I wish it doesn’t get violated but evidence on the ground here and globally doesn’t suggest that any lows established in the last week are inviolable.
Q: We have seen quite a bit of regulatory action in India as well. The Reserve Bank is trying to throw liquidity. May be it will cut interest rates. To what extent can that come as a relief to the stock market?
A: For one, I have been personally very critical of Dr. YV Reddy’s last few CRR hikes. That was excessive and he was just trying to go by the textbook that if you have inflation – you have to tighten and inflation will therefore come-off. I don’t think you can play everything by the textbook. Some things have to be played outside of the textbook and the fact is that our inflation problem was an imported problem and that had nothing to do with domestic demand – whether it is a crude oil or agricultural commodities. I think he went too far overboard in his desire to quell inflation and the result of that has been that lot of money got sucked out of the system through the various CRR hikes and that when you look at in a global context, every single country across the world is reeling from a credit crunch.
India had a lot of slosh in liquidity. We sucked it back. Now we are again a little bit behind the curve. We are trying to give it back. But when markets have already turned sour then these actions while they have to be done and let us face it – there is no other way out but for the RBI to let go of the tight reins, I doubt if that will mean a lot for equity markets in India as they have not mattered even for global equity markets. The Fed has been doing what it can do and probably a lot more than it can do. It is already having a pretty bad looking balance sheet on its own. The ECB has for the first time turned dovish – cut rates after many months, if not years, of staying put and every other economy that has been tightening is actually loosening now.
But equity markets are still headed lower because monetary policy is a blunt instrument. It can have a day or two to rally but that’s about it and I doubt if it changes the basic course of a downward spiral just as raising interest rates in a bull market can pause the bull market for a day or two but it doesn’t necessarily finish a bull market off.
Q: The last leg of the fall has been hastened at least for the index by two largecap names – Reliance which we spoke about last time and ICICI Bank which got in the midst of all sorts of rumour mongering. Where do you see these two heavyweights going from here?
A: In the last episode, we spoke about Reliance as being the largest threat to the market and it has been a laggard in the last couple of months. Our view on that has not changed. We think because of lower oil prices and the fact that it is very large over owned stock we think it is headed lower and will underperform the markets.
On ICICI Bank – our view on banking generally has been that banks in India were trading way too expensively for us to like them and between 2.5 and 4 or 5 times book about a year back. A lot of that valuation has contracted and ICICI Bank has gone all the way down to book value. The rumours I have no idea about what value to attach the rumours but the fact is rumours or not, the stock has sold off big time and which is not the same case for any other bank in the entire peer group whether you take private sector or the public sector banks.
The fact is that ICICI Bank has an overseas subsidiary. ICICI Bank says that it has investment grade paper in those asset books. Investment grade paper in today’s context, I would attach very little value to because AIG was double AA rated on the morning that it was seeking USD 85 billion in financing and I am sure lot of the US banks are still rated A or AA. The US itself is rated AAA which I cannot understand which credit rating agency doing proper arithmetic can rate that country as AAA?
We are not big fans of credit rating agencies and I doubt if anybody sensible would be. So, holding investment grade paper in today context may or may not lend much comfort to investors. What would lend comfort is the fact that the investment grade paper is in reality truly investment grade and we would love to get more details breakdown of those assets because like I said, lot of the world is holding investment grade paper which is really not what the paper is printed upon. Iceland was investment grade till it went bust. That tells you. I would not attach too much importance to an S&P rating or a Moody’s rating because they have all shown themselves as to be completely compromised in every sense of the word. They have been the root cause of this entire problem.
ICICI Bank has suffered. I don’t know rightly or wrongly. I have no real call on that because in banks, it is very hard to make out asset quality and such things without getting full access to the books. All I can say is that the stock looks cheap if everything is absolutely fine and the book is in absolutely fine fettle irrespective of this investment grade logic – the book is generally in good shape. We think at book value it looks attractive. But then again, I must have the caveat in there that investment grade paper means nothing in today’s context – not one bit at all.
Q: For the first six or seven-month of this bear market, a lot of people were in denial that this is indeed a bear – that it was just a bull market correction or retracement. Now those scales have fallen from people eyes but now they are asking the question – how long could this bear market be? Is it going to be another six-months and then we are done with it or is it going to be one of those two-three-year bear markets? From what you have seen in the last one-month, what's your best guess of how long this drags on?
A: Our view has been that you will not see the highs being taken out in the next three or four year’s time – definitely not for the next three-years. Even the most optimistic estimates of what the companies comprising large parts of the index will earn and what multiple you want to attach to those earnings and thereby make a projection for the Sensex, it is very hard to come up with a number that exceeds even 18,000 let alone 21,500. So, our take is that you are not going to see the markets take out their highs for another three or four years and that goes for pretty much every global market.
So let’s at least have some consolation that the whole world will suffer alongside us and which brings me back to my original point which I have always said that there is nothing known as an Indian bull market. We take the bull markets too personally that it belongs only to us. It was a large global bull market based on very easy money. Easy money came to all parts of the world outside of the US because of the weak dollar that inflated prices of various kinds of assets because INR expectations of those dollar is very low considering what they were getting back home. So it came and it fueled your capex, infrastructure, a lot of the ground level growth that you had. So, India grew because of large influxes of foreign capital.
That capital is not coming back in the same kind of intensity that we have seen largely on account of the fact that the dollar will become a very strong currency even incrementally. We see the dollar going to 1.1-1.2 against the euro which means dollar will head back to the US. So, the fact is emerging markets benefited from the weak dollar. They will now get hurt by the strong dollar. Overall three-years definitely we doubt that we will go anywhere near the highs let alone take out the highs. So, it is going to be a tough environment – make no mistake. Anybody who believes that it is going get over soon or things would come back to normalcy is not doing real analysis. I do know still very many people who are still especially hedge funds, which were net longs in the market still hoping for the best. Then you are no longer a fund manager. Then you are just a pure hopeless optimist and may god be with you.
Tuesday, October 14, 2008
More measures in works to inject liquidity, promises PC
As Global Crisis Threatens India, Govt Goes Into Overdrive To Insulate Economy & Assure Investors
Our Bureau NEW DELHI
THE high-level liquidity panel on Monday closely examined a slew of options including cuts in cash reserve ratio (CRR), statutory liquidity ratio (SLR), government securities or gold, and interest rate cut to tide over the liquidity crisis. Innovative measures taken in other countries like providing guarantees to deposits and borrowings of banks was also discussed by the panel chaired by finance secretary Arun Ramanathan. Earlier in the day, finance minister P Chidambaram also promised more measures to infuse liquidity into the system. “We have shared thoughts on what are the requirements. We need to address the liquidity demand,” finance secretary Arun Ramanathan said. The committee is expected to meet again in two days in Mumbai with some industry experts to chart out its final recommendations. It will submit an interim report to the finance minister in a week’s time, Mr Ramanathan said. The panel, which was set up last Friday to assess the requirements of liquidity and advise the government, discussed the situation in the global markets and the actions taken by various governments and central banks. The meeting was attended by Indian Banks Association chairman T S Narayanaswami, UTI CMD U K Sinha, L&T CFO Y M Deosthalee, and Sidbi CMD R M Malla and other finance ministry officials. The committee also felt more steps were needed to address the current cash crunch faced by the system, sources said. Earlier, Mr Chidambaram advised investors not to act in haste. “Our banks are ready and willing to provide credit. Suitable advisories are being issued to the banks. We will respond swiftly according to the needs of the situation. We are working on measures that will infuse liquidity, make credit intermediation smoother and increase the confidence of depositors and investors. We hope to be able to announce them shortly,” he said. Shortly, after the minister’s statement, stock markets jumped 450 points to close 781 points up. RBI’s moves has already infused Rs 60,000 crore liquidity into the financial system. An additional Rs 91,500 crore liquidity adjustment facility is available with RBI to ease the shortage, if required. Mr Chidambaram said the government, RBI and Sebi were watching the situation carefully and coordinating their actions. The RBI had cut CRR by 150 basis points on October 11. The central bank had also decided to defer the auction of government’s bonds of Rs 10,000 crore under its annual borrowing plan, to avoid sucking out liquidity from the system. “We must remain confident and respond to the situation in a cool and mature manner. Especially depositors have nothing to fear because their deposits in banks are safe. Investors must take informed decisions. Before you sell, you must remember that for every seller there is a buyer. You must ask yourself why the buyer is buying in these times of perceived uncertainty and, therefore, ask yourself the further question whether there is a need to act in haste or in panic. In my view, there is no reason at all to act in haste or to give room for panic,” the minister said. Mr Chidambaram said reports of some mutual funds facing redemption pressures were untrue. The root cause of the present uncertainty was liquidity and not any dramatic change in the fundamentals of the economy, he said. “Liquidity was found to be inadequate and, consequently, lenders were unwilling to take risks. Some lenders and investors faced redemption pressures leading to a sale of assets, especially stocks. The markets that are bearing the problem are the capital market and the money market and, to an extent, the foreign exchange market. These problems can be overcome if adequate liquidity is infused into the system,“ he said. “If all the players in the economy remain confident and take informed decisions, I have no doubt that the Indian economy will weather the current storm and emerge stronger,” he said. On growth prospects in the current fiscal, he said: “The economy continues to grow at a satisfactory rate” and quoted a paper by IMF research department which has forecast a growth of 7.9% in the current fiscal. He said though the stock market indices are important indicators, “they are not the only indicators of the health of Indian economy. The ratio of investment to GDP remains high at over 35% at the end of first quarter of 2008-09. We’ve had a good monsoon and kharif crop and the prospects for Rabi crop also look good.” Pointing at the dip in crude and commodity prices, he said it was expected to have a beneficial impact on inflation.
What I have highlighted in RED and BLUE bold letter is exactly what I have talked in my previous post on RBI decision and action.Now ,what YV Reddy did all wrong, is getting reversed by new RBI governor and they had no other option then that.
Just try to read what I have highlighted and one will get to understand.... At the outset the sentence"The high level liquidity panel "itself shows the urgency of the matter.....
I very categorically stated that there was no need for CRR hike in last 3 months when the liquidity was sucked out through the selling of FII's and here comes the SHOT from our Finance Minister.
Atlast some sane thinking has happened and government was able to see the things in correct way.
Rs60,000 cr is now infused in the money market and Rs 91000 cr is ready if needed.Let us see what happens now and how market reacts and how players play.......
Monday, October 13, 2008
I remember I use to ask here and at other forums as well that "What is the exact or even approximate amt of Sub prime mortagage debacle?"This was around in Feb/Mar/Apr
The figures then given were couple of hundreds billions and they were also not so authenticated, maybe less or maybe more.
But it turned out to be bigger then that.Even after $700 bn bailout passed,the US market is not going up.
Well, I started a debate at some other forum maybe a month or so back whether our x-RBI governor did enough to see that India's growth is not hindered while increasing the CRR (Credit Reserve Ratio)?But there was no answers or views , saying we are too small to understand the complexity of RBI action and we need not indulge in it.Others opinions were that what YV Reddy did was good as the Subprime crises came out.
But again there was a redebate on whether YV Reddy did what was needed.
Actually I was of the opinion that YV Reddy was very very defensive in his approach.
When I use to hear him and PC speaking that the FDI and FII inflow is so big that we can't handle I use to get surprised.They were not so big as China nor other BRICScountires that we need to be catious.But they went on increasing the CRR and went on increasing the Int rate as well.
The CRR started getting increased well before the SubPrime Crises came out ,means before Jan 08 , in the name that housing sector is hotting up and economy is also heating up.HDFC chief , Deepak Parekh,also came out with is view that there is a need for increasing this so to cool down.
I didn't understand then that with 8-9 % GDP,and that too for 6 months or so how the masters feels that we are heating up.China was having the growth of over 11% since a decade and only in around Jan08 they went saying that they need to cool down.
Well, the mistake RBI made was even after seeing the market crashing due to FII selling they still went on increasing the CRR rate to cool down the infaltion, which was not so high in Jan 08, around 4-5%.Then what was the need for the CRR rate to increased?Let be left alone, what was the need to increase the CRR rate even after seeing that the liquidity is squezzing due to distress selling of FII which was coming in billions of rupees in after Jan 08?
CRR makes a direct impact on liquidity.If we increase the CRR then bank has no money to lend.They need to borrow more from elsewhere to keep the CRR rise.They made a cascending effect in out market as on one side FII's were selling in big way and other side RBI was increasing the CRR and also the Int rate.So money were hard to get for even brokers and indivuduals who has put their shares as colletarals with bank as the limit becomes less as the limit is decreased for the amt banks give due to CRR hike.So the liquidity get quezzed in any form.
Actually by increasing the CRR and also Int rate we went a step back to hinder our growth.It was just like we ourselves wants to go back in recession!I think after seeing the Financial Debacle in US ,UK ,RBI should have stopped increasing the CRR , instead they went on increasing till last month!The situation is such that our market is going like nine pins and it is like market is discounting the GDP at 3-4%!
CRR and Int rate increased do not help in bringing the prices down.If the money is not there for the farmers, merchants, business man how they will buy things in a big way to stock and sell to consumers?If Int rates are going high then natuarlly the prices of commodities and grosseries will also go high.I think the whole idea is wrong that if we increase the int rate and CRR then we can tame inflation.The real solution for this is , we need to produce more so that the rates becomes stable.But instead of taking steps for increasing the production we are taking the other way which has boomranged!
According to me, RBI should have acted very offensively not to increase the CRR and Int rate when FII's were selling in big way for last 9 months.RBI and Fin just went on looking at inflation as the sole criteria for CRR and Int rate.
What I want to emphasis here is , when the action was needed while FII's were selling in our market RBI did nothing to cushion it instead they make the situation worst and that is why we are seeing the meltdown here.......more due to FII selling then anything else.End result is our market has already discounted the slow economics growth of 3-4% GDP that will suppose to come in next year, which in fact may not be slow as market is discounting and whenever the market will see that it will start going up and next bull run will start before anyone have any clue which use to happen in past.......
Well, these are my view and as I am a science PG , I maybe wrong in my view.Would like to have views from others who have studied economics and learned it in college .....
Friday, October 10, 2008
Crunch time in Pakistan
India must be generous to Pakistan in its moment of dire crisis, says Praful Bidwai
ASIF Ali Zardari has done what no other Pakistani ruler has ever mustered the courage to do. In an interview to the Wall Street Journal, the Pakistan President has declared that India is no longer his country’s arch-enemy: indeed “India has never been a threat to Pakistan”. This is a truly extraordinary statement — if not of strategic reality or political assessment, then at least of intent to terminate Pakistan’s six-decades-long all-encompassing strategic hostility with India, rooted in an adversarial self-definition of the Pakistani state by much of its ruling elite, and expressed in a continuous hot-cold war for most of this period. Not only are Zardari and his “democratic government” not “scared of Indian influence abroad”, he has called Kashmir’s militant separatists “terrorists” and has no objection to India’s nuclear deal with the United States: “Why should we begrudge the largest democracy in the world getting friendly with one of the oldest democracies in the world?” Apart from lavishing generous compliments upon India, which no other Pakistani leader has done, Zardari even makes Pakistan’s “economic survival” conditional upon better ties and trade with this country: there’s no other strategy “for nations like us”. Within Zardari’s scheme, Pakistan’s cement factories would cater to India’s huge infrastructure needs, its textile mills would produce textiles to feed India’s growing demand, and Pakistani ports would help India relieve congestion at its own ports. Even citizen-level initiatives like the Pakistan-India People’s Forum for Peace and Democracy have hesitated to outline such a vision of economic cooperation. And few Pakistani analysts have gone as far as Zardari in acknowledging India’s emergence as a major economic power, vis-à-vis which it would play a naturally asymmetrical yet cooperative role. We don’t know what motivated Zardari to make these iconoclastic statements. The motives couldn’t have been solely rooted in the signals generated by his maiden meeting with Prime Minister Manmohan Singh. Zardari must have known that such pronouncements would draw flak from the domestic opposition, as well as the Pakistan Muslim League (Nawaz) with which his Pakistan People’s Party has an uneasy alliance. Zardari may not be an experienced leader, but he is far too street-smart not to know what he’s risking. Yet, so far only his “terrorist” appellation has been frontally challenged; the other statements stand. Zardari isn’t known to be a man of his word: he has reneged on many of the core pledges he jointly made with Nawaz Sharif, including reinstatement of dismissed judges. Nor could he have been under the illusion that this vision of a nonadversarial relationship with India is shared by the military, with which he shares power. Yet, beyond a point, these questions are irrelevant. What matters is that Zardari chose to stick his neck out by making a landmark overture to India at a critical juncture in Pakistan’s evolution. It is incumbent upon India to reciprocate this gesture by giving a determined push to the peace process and showing a similar quality of generosity. India has a huge stake in ending its rivalry with Pakistan. Indeed, South Asia’s very future of hinges on such a breakthrough. MAKE no mistake. Pakistan today faces its most profound existential crisis since 1947. In some ways, the crisis is far graver than the cataclysmic events that led to the separation of Bangladesh. Today, every institution of governance in Pakistan is in advanced decay amidst endemic political instability, made the more acute by the shaky ruling coalition, which could soon fall apart. The spaces recently opened by Pakistan’s unstructured democratisation could soon shut down. The economy is in dire straits, with inflation running at 25%, the rupee plummeting to a historic low against the dollar, GDP growth in decline, crippling power shortages, and foreign exchange reserves barely enough to pay for two months of imports of oil and food. As militant religion-driven radicalism grows, Pakistan’s western border has become totally unstable. The west’s phenomenally inept prosecution of the war in Afghanistan, with periodic missile and drone strikes across the border killing scores of civilians, has bred unprecedented resentment to a point where “positive” or “mixed” feelings towards al-Qaeda (22%) outweigh “negative” feelings (19%), according to polls. The Marriott Hotel bombing in Islamabad, called Pakistan’s 9/11, was a turning point, bringing home the deadly reality of jehadi terrorism. It was the 11th suicide bombing this year, which raised the death toll in such attacks to over 300. Last year, 3,599 people perished in terrorism-related violence, two-and-a-half times the number in 2006. Meanwhile, insurgencies are flourishing in the North-West Frontier Province, the tribal areas along the Afghanistan border and in Baluchistan, and separatism is growing in Sindh. The horrible prospect of Pakistan becoming “a nuclearised Yugoslavia in the making” can no longer be dismissed as an alarmist fantasy. The US bears a huge responsibility for the crisis — not least because it has conducted the war in Afghanistan primarily as a hunt for al-Qaeda, not as an operation to stabilise and reconstruct that devastated country by building viable institutions, and also because it imposed bad compromises upon Pakistan by backing Pervez Musharraf till the very end, thus undermining the possibility of Pakistan’s organic democratisation. One of the few rays of hope in the situation is the peace process with India, and the recent agreement to resume overland trade across the Punjab and Sindh borders. As I found during a recent visit to Pakistan, there is strong across-the-board support for the peace process and intensified economic relations, which have seen a doubling of trade over just two years. India can contribute to this handsomely by thinning out its troops in the Kashmir Valley, offering Pakistan security cooperation and joint projects in Afghanistan — thus decisively defusing the cold war-style India-Pakistan rivalry in that country — by supplying petroleum products and other scarce materials, and above all, by unilaterally allowing duty-free imports of all goods from Pakistan. Our economy can bear this. The extent of goodwill that this will create cannot be exaggerated, nor the political gains from a stable, secure Pakistan.
Emerging Indian model
Reform FDI Regime To Boost Inflows
ROBUST growth of FDI inflows into the country in the first five months of FY09 amidst financial sector crisis reinforces the attractiveness of India as business destination. But, a 125% year-on-year growth of FDI in April-August 2008 to $14.6 billion does not mean that the government does not need to carry the reforms process forward. Unfinished agenda such as opening up various sectors to greater foreign investment participation should be completed. A recession in the US, EU and Japan can be seen as opportunity by India which can attract global investors looking for reasonable returns. This is the time to come up with policy responses that will ensure India remains an obvious choice for global investors once a semblance of normalcy returns in financial markets. So reforms in some sectors, where investor interest is high, must happen apace. These include retailing, manufacturing, mining and insurance which provide a compelling investment story. It is important that the country gets a larger share of long-term capital than portfolio investments to prevent any crisis on the balance of payment front or undue pressure on the currency. The Centre has eased restrictions in several sectors earlier this calendar year. But it needs to keep the process going. For instance, for many foreign investors, the provision under Press Note 1 of 2005 that requires them to get a no objection certificate from their existing partners is the chief irritant. This clause must be scrapped. Further sectoral caps for FDI that have ceased to make much sense should be relaxed. For instance, why should a foreign airline not be allowed to invest in domestic airline company? Or when we have decided to allow FDI in retail trade, why should it be restricted to single-brand retailing? That is not how retailing is organised. Besides, organised retailing brings more efficiencies into the supply chain, benefiting both producers as well as consumers. The financial services sector, notwithstanding the current financial crises, could do with higher doses of foreign investment under strong domestic regulation. Restrictions on voting rights of investors in banking too need to be reviewed. Insurance sector would gain from capital infusion from both domestic and foreign investors. Doubtless, such reforms must be accompanied by even stronger regulation. India has a chance to demonstrate its own model to the world.