In an interview with Ramesh Damani on CNBC-TV18's Wizards of Dalal Street, billionaire investor Rakesh Jhunjhunwala (on the eve of his birthday) shared his views on the Indian economy and equity markets.
Here is the verbatim transcript of the interview.
Damani: We talk about once in a 100 years crashes, but they seem to be happening once every 10 years now. What is your assessment of the market?
Jhunjhunwala: We are essentially in the bull market that started in 1981. We do have falls, but they do not last for long. I mean we had one fall around 1999, then 2008 and maybe 2020, but the market seems to resume in an extremely short period and that bull-run just continues. If I look at it from a very longer term picture 1999, 2008 and now 2020, the recoveries have been unbelievable and at an unbelievable speed. So I think that long bull market which started in 1981 is very much alive.
Damani: So you don't think we are in a new bull market, you think we are in the old bull market?
Jhunjhunwala: Absolutely, if we look at it from 1981, what kind of corrections we had and how long have they lasted? Correction of 1929 -- the Dow took 30 years or 28 years to achieve that 1929 high. That my friend was a bear market. Here we are retesting highs in a year, two years or three years. Now we are reaching there and making new highs in three-four or 6 months. So essentially that long bull market is continuing.
Damani: In dollar terms at least in the last five years very little money has been made in India, right?
Jhunjhunwala: If you are talking about international markets, I think until 2014 to 2018 the Indian markets did fine. I think we really started what - I would call 'the downfall or the bear market in India' at least in the mid and small-caps in 2018 January. I think that is what bottomed out in March 2020 and the last part of the market, which was standing out would to be financials, which also joined in.
Damani: You talked about India's path to liberalisation and you said in an interview that you were frustrated. What are the important changes that we need to do to reignite growth at 6-7percent at least?
Jhunjhunwala: I think 6-7 percent is too unambitious, we should aim minimum for double digit growth. I think what we need is agriculture reform. I don't know they are not getting publicized, but there is an official press release from the ministry of power -- if the kind of reform they are proposing and it comes through -- I think that is very much needed. We needed reforms in the mining sector, which have been done, we need reforms in land and labour which are primarily state topics and some progress has been made here. Then of course, one very important topic is disinvestments of public sector undertakings, which I think the government is going to attempt in a serious manner.
Most importantly, we need attitudinal change. I think people in the country have created vested interests, which can be overcome only with great political determination. We have brought a change in the agriculture sector, we have overruled APMCs, we have allowed free marketing here.
With not much information, I sense we are going to see major reforms now. One major reform is, "believe in India that we can do it", don't compare ourselves with Singapore and Dubai, we are a different nation. Don't worry America has 230 years of freedom, we have 70 years of freedom, I think the time will come when in the next 12 months we will get the necessary reforms and I think that will set us on a path to a really high rate of growth.
Damani: Would you say that in 1990 the liberalisation happened due to the Berlin Wall falling down? Do you believe that thanks to COVID-19 it has proposed a complete re-look at the economy, is that the catalyst causing us to re-look?
Jhunjhunwala: Whatever may be the reasons, as long as it happens I am happy. Whether it happens because of COVID, whether it happens because Modi decides it - that it should happen is more important and I think it will happen. We have reduced the tax rate, nobody ever thought - I never thought two years ago that India will see 25 percent corporate tax rate, but it is a reality today. So I think the urgency to respect business, to create ease of doing business is being recognised now as more urgent than ever. Necessary steps will be taken and I think in a democracy it takes time, but I think the time has come now.
Damani: Some rates have gone down, I agree with you, but some rates have gone up too. The rate of dividends have gone up, the rate of long term capital gains have gone up, short term capital gains have gone up -- is there something in our mind-set of the way this country is that prevents us from becoming a modern economy? Is it because of regionalization? Is it because of belief in socialism? What is is preventing us from making these big bang changes?
Jhunjhunwala: It is our tryst with socialism from the 1950's and the creation of the vested interest in that tryst, I think that is what keeps us back. The question is to judge today whether it will change or not. My judgement is that it will, I could be wrong.
Damani: You’ve often said, that it is the change that the market respects, is this that can explain the bullishness of the market at this time?
Jhunjhunwala: No. The bullishness in the market could be one of the reasons where reforms could come. I think one very big factor is interest rates. Yesterday I got a call from a lady -- her mother had got Rs 1 crore – who asked the rates of fixed deposits have collapsed, Rakesh let me buy some stocks, please tell me what to buy. So I think interest rates are going to play a very important role.
Second I think is reform. When a market does something and does it very decisively, I have learnt in life that I always lose out just keeping my opinion in mind and not trying to understand what is the market trying to convey. I think it could be the reform, it could be the effect of COVID-19, I think until June the recovery has been far better than what people had expected. So maybe COVID-19 is not going to be as severe as people think, maybe there is going to lot of reforms. The reduction in interest rates is a reality, corporate India is getting extremely efficient. We have cleansed corporate India, if this efficient corporate India meets increased volumes then the earnings could go through the roof. We cannot compare India to America.
America's percentage of profits to GDP is at the highest ever. Household wealth in equity is quite substantially high. In India it is the opposite. Percentage of profits to GDP is at the lowest, and there is no substantial portion of equity in household wealth. So America and India are dramatically opposite in terms of fundamentals. Maybe it could be a start of reversal of what was happening in India in the last five-six years.
Damani: A lot of people have said that this sharp rise in this market, almost V-shaped is liquidity led, you have always scoffed at them. But there is a lot of money sloshing around from developed markets in India isn't it?
Jhunjhunwala: FIIs have not been substantial buyers this year too, they have been net sellers. I don't see anybody, I don't get phone calls - at least the last phone call I got yesterday to invest in equity must be after a long time, I think there is no belief of anybody in equity. So where is the commitment, there is no commitment.
In 2008, when we came in to the fall, the whole of India had invested in equity and corporate India was at extreme levels of leverage. Today I think we have deleveraged corporate India and the commitment to equity in terms of its potential is at minimal and there is very little speculative interest in the market. People come into excess when they make lot of money, so maybe if the Nifty goes up in the next two-three years and people make a lot of money then there will be blind belief, that that is the time when you will have a major fall in the market. So when there is no faith in the market, there is no commitment in the market, I don't know how you can say it is liquidity driven here.
Damani: The one thing that dragged the market down for the last five years was the NBFC sector. What is your assessment right now of the sector?
Jhunjhunwala: I think the worst is already known. I don't think we are going to see any shocks from that sector. May be the growth which they were showing will come down, it will become more selective and banks will play a bigger role. Also, they had gone to valuation levels which were not sustainable, so they were set to correct.
Damani: Let us talk about geo-politics because that does affect our market in one way or the other. Post COVID-19, do you think we will emerge in a bi-polar world -- one led by US interests and one by Chinese interests -- and what are the investment implications for that?
Jhunjhunwala: The depth and the need for globalisation is far greater than what people realise. The advantage the world is drawing from it -- politicians can shout and say anything, but it cannot be easily given up. Globalisation may slow a little, but it is not going to go off at the level at which people are thinking as American companies also have interest in China and China also has an interest to sell into America. In the Cold War there was no economic interest between America and Russia, therefore for the Cold War to develop and enhance with this kind of economic interaction is not easy. There may be shouting, but the actual action will not be much in my opinion.
Damani: Given the fact that we are headed into a US election cycle, does it worry you that the saber-rattling going on between China and India, China and America, China and Japan, could lead to some unfortunate consequences?
Jhunjhunwala: I don't think so. In every US election, I have heard they are going to ban outsourcing to Indian companies, but nothing has happened in the last 15-20 years. In the Cold War there was no economic interaction between Russia and America. Today the economic interaction within the world is so great that it will really take a lot for that interaction to be broken on a sustained basis. It could be lesser than what it is, but I don't think it is going to be majorly affected.
Damani: Bull markets have leadership, where is the leadership in this bull market?
Jhunjhunwala: It is a very initial bull market and leadership will emerge over time. Leadership always emerges from the most beaten down stocks, it does not emerge from favourite ones.
Damani: What are un-favoured sectors? Would it be telecom and pharma for example?
Jhunjhunwala: It could be telecom, pharma, it could be the public sector, provided the government changes its policies.
Damani: Changing the policies? What the government can actually do is honest privatisation. Do you actually think the government is ready to bite the bullet and do that?
Jhunjhunwala: In my judgement they are ready to bite the bullet.
Damani: So will we see BPCL and Container Corporation happen in the next 90 days or six months?
Jhunjhunwala: I would say it would take nine months, but once it starts it will be a flood.
Damani: In 2004 when you saw this bull market and you made great handsome gains through stocks like Titan, Lupin, Crisil -- 100x, 200x -- do you see a similar set of opportunities in India today?
Jhunjhunwala: An opportunity is always there, whether it was there or not only posterity will tell us, but opportunities are always there.
Damani: There is a sense among a lot of analysts that the market is out of reality with what is going on in corporate India. Would you subscribe to that view or do you think that market is looking through just one bad quarter of earnings?
Jhunjhunwala: There is say an XYZ company, I think it is going to do very well in 2021-22. How well it fares in 2020-21, how important is that? Am I going to sell my investment or am I not going to invest because it is going to fare well in 2020-21, if I am confident of its performance in 2022?
Damani: So Q1 and Q2 is a look through and the market has discounted that and when bad numbers come, in your estimation the market would not react violently to that, am I correct?
Jhunjhunwala: It may not react violently only if it still has confidence in future performance. After having said all that, suppose Nifty today is at 10,500, if the Nifty has to make a range between say 9,500 and 10,500 for the next six months and not go up, what is wrong? We are in a bull market doesn't mean that stock market is never going to correct temporarily, it is never going to go down or it is going to go up every day. Here if Nifty falls 200 points everybody is ready to write an obituary. What is wrong if Nifty falls by 500 points, doesn't lose or stays between a 1,000-point range for the next six months? To my mind we would still be in a phase of the bull market.
At the slightest fall everybody is ready to write an obituary. Everybody I meet says 'your market has gone crazy', I don't know why? Either there is some manipulation and I don't see any positive figures from the foreigners, so I don't understand and when I don't understand why it is rising, I better try and understand why it is rising here. In all humility let me respect what the market is doing.
Damani: In your view, in early 2021 will the COVID-19 crisis be behind us?
Jhunjhunwala: I don't know whether COVID-19 will exists or not, but I know one thing that it will be accepted like any other flu because it will be treated much better, far lesser cases will require hospitalisation. You fly in an aircraft and today planes crash, you travel by car and 2,20,000 Indians lose their lives every year in car accidents. So I think it will be within the grip of humanity. It may not vanish, but people will learn to live with it.
Damani: Where are opportunities, where do you see opportunities today -- small caps, large caps, which sector, give us some headway into your thinking?
Jhunjhunwala: I see the biggest opportunities in the most battered stocks and the most un-favoured stocks.
Damani: That would be B group, right?
Jhunjhunwala: No, even in the A group, even in large caps. There are a lot of stocks where companies are dead, they will never revive, I think there are a lot of opportunities in those companies because the risk if you are right are far greater than the losses you can have.
Damani: Am I sensing you are bullish on public sector banks for some reason?
Jhunjhunwala: No. I don't look at public sector banks.
Damani: Sum up your feelings about the market at this stage, just give us an executive summary if you will.
Jhunjhunwala: Technically, we are in an absolute bull market. We are in the start of a bull market. You have breadth, you have disbelief, you have nervousness, you have lack of commitment and market refuses to go down. Every bull market starts with an event which shatters everybody so much that everybody keeps promising that he will never buy stocks again and then the first rise never has faith. So technically we are surely in what is going to be a long bull market and then sometimes the market can mislead you, but that is very rare.