Rakesh Jhunjhunwala Says India At The Cusp Of A Bull Market
It’s the darkest before dawn—that’s how billionaire investor Rakesh Jhunjhunwala describes his optimism about India and its equity markets.
“There are too many indicators to show that typically before the start of a bull cycle, there is a deep fall,” Jhunjhunwala, partner at Rare Enterprises, told BloombergQuint's Niraj Shah on the sidelines of the CMT Association's 2020 India Virtual Summit. “It happened in September 2001, and then the index that we got never came back.”
Signs are similar to the creation of the bull market, he said. The first rise is always treated with great scepticism, according to him, and then the roaring bull market stays alive.
India’s lockdown to contain the pandemic stalled the economy in the initial phases as only essential services were allowed. The nation’s GDP contracted the most among large economies in the quarter ended June and is on track to contract in the full fiscal as well, the first time in decades. Nifty 50, after tumbling initially, has surged more than 57% since the March lows.
The consequences of the pandemic have proven to be far lower than what people feared, and that has aided the market sentiment.Rakesh Jhunjhunwala, Partner, Rare Enterprises
While black swan events can happen any day, as long as there is scepticism and no mass participation, this bull market will stay alive, Jhunjhunwala said. The scepticism, according to him, is borne out by that fact that at the current levels, no one is ready to participate.
The market could top out around these levels and then settle in a range, he said. Even within that range, the bull market will continue to remain alive.
He expects large caps to do well. Sectorally, he said, things will change and some of the less-referred sectors and themes could make a comeback.
‘Growth To Rebound’
Jhunjhunwala also doesn’t see the market decoupled from the economy. The surge in markets will be accompanied by strong economic growth, he said, adding India will recover in the next fiscal 2021-22 even if the GDP contracts 9% in FY21.
While some of the indicators such as manufacturing and services PMI surveys and auto sales are suggesting a slow rebound, Indians have cut down on spending amid wide-scale job losses and salary cuts after the pandemic. Economists, too, expect a slow recovery, given that India didn’t announce any meaningful stimulus to boost demand and most of the measures to boost liquidity and credit came from the central bank.
Yet, according to Jhunjhunwala people are underestimating that change that has come in India. India could hit double-digit GDP growth in FY24-25, which not many expect, he said. “The recent spate of reforms will create conditions for growth, and foreign capital will just pour into the country,” he said citing changes in labour and farm laws.
While Jhunjhunwala agrees that India needs stimulus measures, he considers longer-term policy measures more important. The fact that India provides a large local market, in addition to land and labour and capital, is a big pull factor for any large global player, he said. Corporations, according to him, will come to India not because of wanting to move away from China but despite China.
Watch the full video here:
Here are the edited excerpts of the conversation:
Do you think that we are at the start of an economic cycle and a market cycle the way we were back in maybe 2000 to 2003?
I won’t say that it’s exactly 2003 but we are somewhere like that. At least technically, the market surely is. The fact is that corporate profits to GDP in India are at the lowest levels which was the case in 2002-03. In 2002-03, the valuation of the entire market was very depressed and now a certain section of the market has got very good valuations but largely valuations are depressed. We could say that there is some kind of a similarity to 2002-03. I truly believe in India is on the verge of a new economic cycle and a new economic recovery. I’m very bullish on the markets.
Would you believe that the markets could do well despite this whole cacophony for the last 12 months about how the economy is not doing well but the market is going one way. Would you believe that even if the economy doesn’t do as well, which well could, the markets could still continue to be healthy?
It is darkest before dawn. There are too many indicators to show technically and typically before the start of a long bull cycle, you have a deep fall like we had in 2001 after Sept. 11. Then, the index that we got after 2001, Sept. 11 never came back. But the market took time after that. Then the first rise is always treated with great scepticism. I believe that very simply put, and I look at things very broadly, I think people are underestimating the change that is come in India, which will slowly accentuate. I believe this year we may dip 10%, 11%, 9%-8% I don’t know. Next year, I think we be at the same level as of 2019-20. So, if we dip 9% this year then we will recover 9% next year. Then the economy will be at 2019-20 levels. Now after that I see no reason why India should not grow 6, 8-10% with corporate profits also growing well. There is vast underexposure to equity and then there is huge savings in India. We have created institutions with structure- to attract money to equity both in Indian and foreign.
I see a vision of India which is vastly different from a lot of people and I reserve the right to be wrong.
Remember one thing with the stock market, Mr. Buffett says if the stock market was based on the past then the historians and the librarians would have been the richest. If the markets had to be about the immediate GDP growth, then the economists would have been the richest. That’s my opinion and I reserve the right to be wrong. I will do things as I see them.
What do you mean when you say that you see a vision of India which is vastly different than the others?
I believe India will grow 10% by 2024-2025. Nobody believes that. I believe innately in India’s skills as a democracy and in its and people. What we have to do is, I am not a theoretician, but we have to create ease of doing business and if we create that, with every passing year we are building a better democracy. We are building a better social welfare system and better ability for the enrichment of our people. So people are underestimating what Jan-Dhan, GST, RERA, the IBC, labour reforms, agriculture reforms- there is a big is a big boom and I think India will at least add about $25-30 billion of software exports every year. I think that will unleash at least $20 billion purchasing power in India. I think India will be the leader in Pharma- in the world. I see no reason and I think if we want to create conditions and foreign capital will just pour into this country. There’s so much capital available in the world if we can ensure 8% return on capital, then sovereign funds will put any kind of money. I envision all of this happening and this is a journey, it’s a process. It’s not going to start on one day and end on one day. But it is going to get speed as time passes, that is my belief.
I know you mentioned that this is not maybe similar to 2000 to 2003 but somewhere there. Can I ask you a follow up question, you are a buyer for the long term, your balance sheet can handle large hiccups as well. What do you reckon that this is a smooth journey until that 10% growth in FY24-FY25 or could it have very large variances?
10% is not sacrosanct. It could be 8% too but I think we’re going to see an upward base growth level in India which is going to be very quick and no journey is linear. There are going to be hiccups, there are going to be difficulties, there are going to be doubts. If it could be very easy, then everybody would make money and it would be very easy to win. But my feeling is that we will get there.
In the opening remark you mentioned that technically as well we are set for a large move upwards. Everyone here is waiting for how you look at the market technicals and the charts if you do- can you speak a bit about that?
I use technicals and I think they are important. What are technicals? They are price formations. They say that the past price formations are the indicators of the future. I think they are important but I look at them on a very broad basis. I look at breadth and if anything rises, I look how much of the rise has been retained. Then I look at behavioural science, not by reading books on theory but by looking at market size and whether people are sceptical or not. So, the market has good volume with great scepticism. One by one all parts of the market are participating. Shares are gaining and if shares rise 40% in five days, there is an exhaustion. Individual shares are rising, then they’re breathing, then they are going into corrections and another part of the market is rising. All these indicators indicate that there is a long way to go and the leverage is not building up as the markets have been. That is another technical indicator. So I look at technicals in a very broad manner and everything in a market is indicative and nothing is conducive except price.
Do you reckon, and I mean, is there a feeling that maybe we have run up a bit too much and could the near term concerns like maybe India-China issue which is there and alive and kicking, could that or the U.S. elections could have some bit of bearing on the near term? Any thoughts on that?
See, good stocks always remain expensive. Asian Paints will always remain an expensive stock. In my experience, Kotak Bank has given 35% return in dollar terms since 2002. So, they’ll always remain expensive. Good things in life don’t come cheap. As long as that is skepticism and there is no mass participation and build-up of leverage. Black Swan events can happen any day. If you look at it, the market has gone from 7,500 to nearly 12,000- look at the amount of skepticism and nobody is ready to participate.All TV channels are anxious to broadcast how much the market is at and when is it going to correct. So, the personal feeling is, suppose the index has topped out today, or maybe it will be at 12,000 or 12500, it makes a range. It’stopped out today, then it makes a range between 10,000 and 10,500, then the bull market is very much alive. I mean, the market is going to correct at some point and market is going to pause. The question is, when will it pause? But that pausing and making of a narrow range does not mean that the bull market has come to an end, it is only a pause. I won’t be surprised if the market makes a range and then stops going up. In that individual stocks will keep performing or changing. As long as the markets fall isn’t with too much bad breadth.
You reckon that the base could broaden? We’ve already seen it in bits and then there have been measures being taken which everybody talks about like for example the multi-cap fund measures etc I mean whether it’s right or wrong is debatable but it’s happening, do you reckon it could broaden its base even more, while we are in this range?
Multi-cap stocks fund comes along or not, if I’m right about it being a bull market it will broaden. Multi-cap fund is not the basis on which it will broaden. The first thing is always that the large caps will outperform.
Just one small question because the street is divided around this which is the fact that dire predictions around Covid-19 and it’s impact may be behind us- it is a known-known but the numbers are still very large. Does that worry you?
25 lakh people in India get a flu every day and at least 4 lakh get cured and 4 lakh join every day. With a simple calculation of a 140 crore of Indians, we all have flu for at least seven days on an average. So, 10 crore man days of flu. You divide it by 365 days, 25 lakh Indians have a flu every day on average. Now, if the flu lasts for seven days, every day 4 lakh join again and 4 lakh leave. So, once it is treatable it will be another flu. It is getting far more treatable. So, it’s a flu and not a cancer. I hold that from day one. So, now, one of the reasons the market is going up is that people had become so depressed and so apprehensive of the pandemic that the consequences have proven to be far lesser than what they had anticipated. I am no doctor, but I think we will learn to live with it just like any other flu in time to come, every preceding day they will learn to treat it better.
I wouldn’t ask you to second guess what the impact of the flu would be but I just wonder whether you believe that that or the India-China situation is at tail risk which you would maybe make vision for in your portfolio as well or you’re not to unduly worried about it?
Don’t know how to make a provision in my portfolio for uncertainties but I personally feel there is not necessarily going to be a war between India and China and surely not in the winter. I don’t think there will be a war because the consequences for China…India is not going to ignite a war but is going to respond. And the consequences for China to have a war geopolitically are too severe and the gains are too limited. Now India has also shown first-time aggression, so China has realised that it’s not as simple as it seems. And we have captured some of the mountain heights and now, we are much better prepared. I am not of the opinion that China will not be feared but as far as the pandemic is concerned, the places where has been very well contained Korea, Germany, supposedly China. So there is going to be variation but worldwide I am not so much afraid that there’s going to be a second wave and the second wave is going to be bigger than the first wave, because we have pretty much well prepared. We have medical facilities and now we have knowledge. It may lead to herd immunity in the next three to four months.
With the ease of doing business, I think it is a process and it’s a journey, not a destination. It’s improving everyday. People are not understanding the implication of the land reforms. There was no control in India for distribution. Anybody could buy from anywhere in any state and sell it anywhere. Today, milk is bigger than wheat and rice put together, it is a Rs 8 lakh crore business. The farmer in India gets the largest part of the price that the consumer pays. So, people are underestimating the effect of agriculture reforms. The electricity reforms which are proposed by the government if they are done, they are path breaking.
The government already has the draft ready and everybody will be billed at the rate decided by the government and everybody will be pre-paid subsidy into the bank accounts. So, first of all, theory will go away because it should be built to get the subsidies. I think they’re path breaking reforms. The boards will have to open up to get money or get power from the private sector players. This cross-subsidisation will go away. Then we have the mining reforms. So we’ll have the sell all the PSUs.
There is a whole list of people who say we’ve done just the right thing because we didn’t need to overstimulate it a point of time and don’t stretch the balance sheet and there is an equal criticism of the same. Where are you and why on this because Sanjeev Sanyal did say a few days back that there will be another round of stimulus done at an appropriate time.
I think we need a few stimulus but we need to be very careful. We don’t need a blind stimulus. I’m more concerned about the longer-term policy changes than about immediate stimulus. I think longer term changes are more important to me than the immediate stimulus.
Do you reckon the near term needs are some bit of stimulus to tide over-I mean, I mean, Anand Mahindra was on record saying that, let’s do something for people not from a markets perspective or from a living perspective as well. Do you think that should and can happen and could that hurt?
I think personally if I were to decide, I’d give the biggest stimulus to the long-term infrastructure business as that would create employment. You already have rural employment scheme, we could could have an urban employment scheme. That’s where I would concentrate. Maybe the worst seat is in the airlines and hospitality- they require some of kind a stimulus.
In the last three four years of the haves doing really well the powerful firms and the polarisation that used to happen. If indeed these refunds take shape and form the way they are, Pranob Sen was referring to aggregate forms as akin to 1991. Do you reckon that naturally, it just opens up a lot of other investment avenues in areas which were hitherto considered to be un-investable or untouchable?
Absolutely, that’s the purpose of the agricultural reforms. Today, if I pay Rs 40 for a kilogram of potato, the farmer gets Rs 4, I should pay Rs 30 and the farmer should get Rs 12. That can be done by having better efficient systems, direct contact with a farmer. See the difference between the price and the farmer gets as in the case of milk, the price that I pay should go down. Don’t forget it India is the second largest producer of fruits and vegetables in the whole world so the value of the crop of fruits and vegetables also more than all the cereals, put together. Can you imagine that the Maharashtra government has bought 40,000 tonnes of onion at Rs 4 and they are able to now sell it at Rs 20. So, now when the price of tomato or potato goes to Rs 2, under the original commodities, you couldn’t buy it because it will exceed storage capacity. Then this will also lead to the improvement of farming activities because those who buy will then help the farmer get a better profit. So, this is forced and unleashed. Today you read in the paper that India’s farm exports are up to around 43%. Remember the value-added of farm exports is very high.
The society reward is important to not how much we export but economically, what is important? What is the value added. If you buy something at 90 and I sell it for 100, what I get in India is 10. When we export our potato what I get in India is 90. Then, it can also be used for food processing and there are unlimited opportunities. See, the opportunities in India are so great and the skills are so great. Once you create conditions for that to be unleashed, people will be unleashed to do this.
Would do you reckon that by FY25 growth numbers being high too. I was thinking about the CAD math, now that we have this PLI scheme for electronics and if indeed electronic imports go down, you mentioned about these agriculture reforms and what they could do.
This is going to come in a form once one company comes. First of all in India, there are tariffs and India is a large market. So, if I’m Apple and I produce phones and I am selling 1 million phones in India, it’s better for me to then produce 2 million phones in India to export. Once you have the reforms of labour, land is available with all the district governments- they are all fighting to get manufacturing. If electricity is available, labour is available and the local market is there, why won’t people come? I don’t think people will come because they want to get out of China but people will come despite China.
It seems that you believe that on the macro print as well whether the whether the CAD numbers or otherwise will do much better than what we’ve done in the past 10-15-20 years.
I think so, I hope so and I believe so.
The other question and in relation to the earlier answer that you gave the line still now seems to be firmly drawn. People prefer pharma, technology speciality chemicals- those businesses are at the forefront. By broadening of this move that we talking about you reckon that the favourites could change?
It is going to be a relay race, boss. It’s going to be a relay and everybody’s going to participate by turn. That’s what I envisage that everything is going to participate.
I’ve heard you in the last two three months on a number of occasions and you sounded extremely bullish on India becoming if not the factory of the world and amongst the largest producers in a lot of spaces- software pharma etc. You reckon that even if others are participating, these should be the core part of portfolio? Are they a core part of your portfolio for the next few years?
I won’t advise about what your portfolio should be but you have to understand one thing that 40% of all medicines which are eaten in America are made in India. So, you can recreate this kind of an industry without knowledge costs. You can have a large export industry provided you have a large sustainable and a competitive export industry. Not based on just on wage costs- this is only if you have a large local market. With Ricardo’s theory on exports, you get exports in the industry then you get advantage then your advantage increases so the size further increases. Everything in India if you unleash the forces…in defence manufacturing, India can become a big exporter of defence hardware. Now defence hardware is going to be more and more technology based, for which India is very well suited. If you involve software, it is going to be very important. When you think of it we are only creating conditions where we have ease of doing business which is not easy and we’re still doing it and trying.
Does anything worry you?
What worries me is Pakistan’s nuclear bombs, nothing else. Because that’s a failed state. It can be delayed but it cannot be denied. We have to understand that we go into equity investing with a lot of uncertainty. So, the unknown uncertainties are always there- what can we do by worrying about it?
I was just wondering if I’m in such a bullish picture that you’re painting or at least you believe in..
I believe that Mr. Modi’s continuations of Prime Minister is very important so that all that he has informed and envisaged is implemented. I mean, someone should have the political power and the will in India to push down these reforms. These labour reforms we’re trying to do the last 20 years, these agriculture reforms the government had notified five years ago but the Maharashtra state governor was not implementing it at all.
I think your base case is that these would now get done because this government is showing the will to be able to do it stronger than any time before?
They have pushed the agriculture and the labour reforms. They will push the electricity reforms also and in mining - even the environment. I think we must respect the environment, but we have to be very reasonable too. That is what the government is trying to do.