EXCLUSIVE RAKESH JHUN­JHUN­WALA On NaMo’s Im­pact On Econ­omy & Mar­kets Struc­tural & Sec­u­lar Bull Mar­ket — In­evitable and Ir­re­versible

The Economic Times - - Markets & Finance -

8 Aug 2013. Nifty in­dex 5,285. That day, the for­tunes of In­dian eq­uity mar­kets turned, and how! Mar­kets are wiser than all of us, they bot­tom in the depths of de­spair. They looked be­yond the im­me­di­ate de­spair of a fall­ing cur­rency, shrink­ing sav­ings, ram­pant in­fla­tion, tight mon­e­tary con­di­tions, banks sad­dled with NPAs, strug­gling cor­po­rates, de­te­ri­o­rat­ing capex cy­cle, and thin­ning prof­its. Mar­kets are pre­scient. They be­lieved in the long-term po­ten­tial of In­dia and recog­nised that the pall of gloom was but an aber­ra­tion. Mar­kets were pre­par­ing for the cat­a­lyst of good gov­er­nance and good poli­cies. And they fi­nally found that cat­a­lyst in the em­phatic man­date to Naren­dra Modi for change and de­vel­op­ment.

Dur­ing the chal­leng­ing years of 2008-13, In­dian cor­po­rates have re­struc­tured and be­come more com­pet­i­tive. Cor­po­rate gov­er­nance has be­come bet­ter; and yet In­dian in­vestors have be­come more risk-averse and grossly un­der­ex­posed to eq­uity. We have come to be­lieve that high in­ter­est rates, poor earn­ings growth and net out­flows for do­mes­tic eq­uity in­vestors are the new nor­mal. These fac­tors are about to change, and for a very long time. This change is in­evitable and ir­re­versible.

We are at the cusp of an era of strong pol­icy frame­work, busi­ness and in­vestor friendly en­vi­ron­ment, elim­i­na­tion of sup­ply-side con­straints, ini­ti­a­tion of a new capex cy­cle, fall­ing in­ter­est rates, re­sump­tion of job cre­ation, ris­ing sav­ings and a wall of for­eign in­flows com­bined with do­mes­tic out­flows re­vers­ing into do­mes­tic in­flows with a vengeance. While this is more ob­vi­ous now, most of us are un­able to com­pre­hend the scale and the longevity of this change. We are at a stage where we are blinded by sud­den light af­ter be­ing in a dark tun­nel for years. We are un­able to con­ceive the im­pact of a tran­si­tion from the vi­cious cy­cle de­scribed above to a vir­tu­ous cy­cle the scale of which we have never ex­pe­ri­enced be­fore.

Let me share some sta­tis­tics with you. Cor­po­rate earn­ings grew at a CAGR of only 3% in 2009-14 com­pared to a CAGR of 19% in 2003-09. Cor­po­rate prof­its as a per­cent­age of GDP has re­ceded from 7.8% in 200708 to 4.2% in 2013-14. If cor­po­rate earn­ings were to nor­malise to their long-term aver­age of 5.6% of GDP by 2018, that would im­ply a CAGR of 22% for the next four years. In­ter­est rates in In­dia are among the high­est in the world. Greece bor­rows at 5% in­ter­est rate com­pared to 8.6% for In­dia.

CPI in­fla­tion in In­dia has been per­sis­tent, driven by un­abated protein food in­fla­tion. In light of the sta­ble ru­pee and re­ver­sal of fac­tors push­ing food in­fla­tion, and core in­fla­tion com­ing un­der con­trol, long-term in­ter­est rates have most likely peaked. We all know Price = EPS x PE. We have for­got­ten what hap­pens when both EPS and PE ex­pand rapidly and cor­rect years of sup­pres­sion and de­pres­sion. Marc Faber said: “Bull mar­kets are con­ceived in the depths of de­pres­sion, and are reared on de­clin­ing in­ter­est rates and in­creas­ing cor­po­rate prof­its.” Any num­bers on earn­ings, in­ter­est rates and val­u­a­tions will be in­ad­e­quate to de­scribe the quan­tity and qual­ity of im­prove­ment that can and will hap­pen in ev­ery di­men­sion im­pact­ing eq­uity mar­kets. The cur­rent earn­ings are so un­rep­re­sen­ta­tive of the likely fu­ture earn­ings that val­u­a­tion ra­tios pred­i­cated on cur­rent earn­ings will re­sult in miss­ing out on a struc­tural and sec­u­lar bull run. This will not be a multi-year bull run, but a multi-decade bull run.

While the re­cent rise ap­pears to be “too much, too soon”, it is a pre­view of the struc­tural and sec­u­lar bull mar­ket that we have been de­prived of. The 1991 peak was de­ci­sively over­come in 2000 but was short­cir­cuited by the In­ter­net bub­ble burst. In­dia did have a great run from 2003-08, but that was cut short by the global fi­nan­cial cri­sis, the Euro cri­sis and poor gov­er­nance dur­ing the UPA 2 regime. In the struc­tural and sec­u­lar bull mar­ket that be­gan in 2013, I ex­pect that we will have a be­nign global sce­nario starved of growth and an un­prece­dented vir­tu­ous do­mes­tic cy­cle.

In the last few years, there shas been a great po­lar­i­sa­tion of val­u­a­tions be­tween the de­fen­sive and high free cash flow (FCF) sec­tors of IT, pharma and con­sumer stocks as com­pared to the cycli­cal and lever­aged plays of in­fra­struc­ture, cap­i­tal goods bank­ing and real es­tate. There has also been a high pre­mium for large-cap stocks as com­pared to small and mid­cap stocks. It’s my be­lief that these po­lar­i­sa­tions and pre­mi­ums will re­vert to the mean. As in­vestors and traders, it would be a fa­tal mis­take to ex­trap­o­late the past into the fu­ture when the big­gest change is set to un­fold. Re­mem­ber, mar­kets will al­ways sur­prise both on the up­sides and on the down­sides. One must not try to quan­tify the move in Nifty, but try to buy right and hold tight. It is im­per­a­tive that we ap­pre­ci­ate the im­pact of surg­ing for­eign in­flows com­bined with do­mes­tic in­vestors play­ing catch-up on net in­flows to cor­rect the sys­tem­atic un­der­ex­po­sure to eq­ui­ties. Fi­nally, we will have a favourable fund-rais­ing en­vi­ron­ment en­abling the avail­abil­ity of much-needed risk cap­i­tal for In­dia’s growth. I would ad­vise all In­di­ans to have faith in In­dia and its mar­kets. We should not be un­der­in­vested for the mother of all bull mar­kets. Be pre­pared for the in­evitable and ir­re­versible; struc­tural and sec­u­lar bull mar­ket. I be­lieve we will all be pleas­antly sur­prised by the longevity and mag­ni­tude of this bull mar­ket. Lest we for­get, all that we need is God’s grace and Elders’ bless­ings. Happy In­vest­ing.

Rakesh Jhun­jhun­wala co-au­thored this ar­ti­cle with Ut­pal Sheth, CEO of RARE En­ter­prises

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