All market experts have got a good sense of what will happen to this economy and to the stock market if the United Progressive Alliance (UPA) or the Third Front or the National Democratic Alliance (NDA) come to power after May 16.
Trader and Investor, Rakesh Jhunjhunwala, sees the results of general elections 2009 coming in as a big surprise. According to Chairman Enam Securities, Vallabh Bhanshali, the Third Front will come third.
Jhunjhunwala said elections are important for markets, but at present global cues are of a greater importance. Bhanshali also agrees that General Elections 2009 will not be a turning point for stock markets.
Managing Director Morgan Stanley, Ridham Desai, said elections 2009 are very important. According to him, India’s relative performance compared to other world markets hinges around these election results because it comes at a point which is quite critical to our economic cycle.
Elections 2009: What do the markets want?
Jhunjhunwala is of the view that NDA supported by Mayawati is a better option for markets.
According to Jhunjhunwala, markets are showing strength and are rallying because of sheer value, but investors are waiting for poll results. He believes May 16-30 will see high volatility in stock markets.
Jhunjhunwala stated that Goods and Services Tax (GST) is the most needed tax reform and should be introduced by April 1, 2010. Desai agrees with Jhunjhunwala that GST will be a big revenue earner for the government.
Bhansali said any government supported by Mayawati is acceptable. According to him, a government which is stable is worse than one that does not take action. "We need to move to the agenda of nation building." He does not see markets moving up in the next 6-8 weeks.
Bhanshali is of the view that divestment of public sector undertakings (PSUs) will depend on political combinations. According to him, UPA has failed spectacularly on power and roads.
Desai believes that markets may hesitate if UPA supported by Left comes back to power. "Any government that does not promise action may evoke negative reaction from foreign institutional investors (FIIs)." He is of the view that markets will look for concrete decisions and there are more than 50 per cent probability that markets will break out of this range.
Where do experts see markets headed?
Jhunjhunwala feels the Nifty may touch 3,850-4,000 during the year. Meanwhile, Desai believes the Sensex will range between 7,000 and 15,000 by December. He advises investors to focus on companies with good balance sheets.
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Here is a verbatim transcript of the exclusive debate with Rakesh Jhunjhunwala, Vallabh Bhanshali and Ridham Desai on CNBC-TV18. Also watch the accompanying video.
Q: A lot of people have been suggesting that this Election 2009 is a make or break event for the stock market, it is a turning point. Do you agree that it is a major turning point for the stock markets?
Bhanshali: I don't think so. The stock markets have had many situations like this. It is the nature of the market to handle everything. So, I don't think it is a major turning point as such. Market will live to face many things.
Q: So, it will be like one of those budgets where a lot of noise happens before but a few weeks after the event, the market just moves on?
Bhanshali: I think it is a significant debate. It is more than a budget because the budget is about one year. This government maybe about an uncertain period, one-year, two years, three years. Therefore I think it is more significant than just one annual budget.
So, I would think that there is a huge premium to stability that we haven't seen for a long time. These are extraordinary times in the world. These times require leadership, there is great lack of confidence, confidence has to be cajoled back into every sector, every layer of the society. Therefore not only a stable government but a capable government is what we need. If the markets don't see that, they will be worried.
I think as we go along, there are many reasons to think about the importance of this government because we have to put into perspective what happened over a 10-year period. It is not only one or two or three years that India has come around. India was a written-off country until 1997-98. It is a series of events that have shaped that took us to a moment where we could at least consider saying that India was shining, whether it was shining or not is a debate. But it was a plausible thing.
Today the world is not shining. India is not shining. We like to think because we are growing faster than others that we have conquered the Everest. It is not like that at all. Spending one hour in this hall was not really a great pleasure.
Q: Do you also think that it will come and go and not alter the course of the market beyond the short term?
Jhunjunwala: I would like to answer this in a very different manner, the politics and the administration of this country in comparison from other countries is what distinguishes us from sub-Saharan Africa. We have better governments than the ones in sub-Saharan Africa, as an Indian I am very happy that despite having no single party in power in the Parliament, we have had 20 years of perfect democracy with all the institutions of democracy working perfectly well- the army, the judiciary etc. So the Indian democracy is deeply rooted and when I look at history I don't see of any society which has achieved prosperity without capitalism and having achieved they detained it. So this is one observation we would like to make of the political process.
Politics is extremely important for the markets, administration is important, we have deep rooted democracy and what I feel about this election is that nobody knows what is going to happen.
My personal judgment says that the third front government is not going to be formed and as far as markets are concerned, elections are important and at the moment global factors are more important.
Q: You have written a report where you have suggested that India's relative performance compared to other world markets actually hinges around this election result, tell us why you think so?
Desai: Its coming at a point which is quite critical in our economic cycle, we are facing very difficult global situation. So the world is not going to help us, our fiscal deficit has expanded and there were a lot of numbers debated in the previous session. Our own estimate is that on a consolidated basis that number is around 12.6 per cent for the year that ended yesterday.
On a projected basis things are looking slightly better because of the crude oil, the fertilizer deficit is reducing but we don't know how much tax revenues will fall. The point is that we are starting with a situation where fiscal deficit is high and at the same time we need to spend money. So I don't disagree with the political comments that we need to spend money as a government, it's a difficult government balancing act. So whichever government comes to power, it needs to execute and that has not been the forte of some governments in the past and that is the challenge that we face as an economy.
I think India will start doing better than the rest of the world because we don't have a balance sheet crisis in the banking system, we do have an NPL crisis, there will be a deep NPL cycle in the next 12-18 months but its not a balance sheet crisis. We have a growth rate which is likely to be better than most parts of the world. It will be definitely slower than what we had in the last five years but better than most parts of the world infact maybe the second or the third best in the world.
The only challenge we have is this fiscal deficit which is staring at us and it needs to be fixed and we need some stimulus in the next 12 months, so that the economy has some support. That's where the government's importance is and if we get a good election result or if we get a government that has capability to execute then I think we should start outperforming the rest of the world in the forthcoming 12 months.
Q: On the point that you were making. If indeed on the 16th of May we are presented with a verdict that the UPA has say 180-190 seats, the NDA has 180-190 seats and the rest is all the other parties. Do you think any of the formations which can happen subsequently can assure the market that we will have a stable government for five-years – forget about what policies each government might take but can we then tell ourselves whatever the government this is, whatever polices it takes, it will last for five-years?
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Bhanshali: I think the leader of that coalition would be a very important factor and the other important factor would be whether Left is a part of that coalition or not. We have seen what can happen if the Left is there. How much leadership Congress really had one does not know because they blame every lapse at the door of Left but I would think that if it is a centric national government party leading the coalition and one of the known faces, you would breadth rather easy. There are many frightening prospects. I would think that if it is NDA UPA without the Left in any combination that's the best for the market can hope for.
Q: Even an NDA which has Jayalalitha and Mayawati supporting it?
Bhanshali: Then we will get to the next level which would mean that what is the leadership. How is the power divided? Is it going to be UP formula as in the past where what can be expected therefore at least you will begin to consider as to what the equation is, what the understanding is but that's the best that I would hope for. I would at least say that let me read the newspaper beyond as to what is happening but if that is not the case I am pretty worried.
Q: How will the markets react to this outcome?
Jhunjhunwala: First of all markets are always uncertain. We don't know the government which is going to come. I would like to focus rather on the long-term. How is India going to grow double-digit despite all this deficits, I am an optimist and I can be wrong, that we need a government which needs to work to get the second green revolution. One cannot have the second green revolution unless you are ready to take some hard decisions by paying Rs 60,000 crore fertiliser subsidy you are not going to have green revolution.
Unless and until these matters are resolved and I am not very hopeful that whatever the government and whatever be the composition that we are going to get government who is able to take decision that are needed. In the shorter term I feel whether it is a third front, whether it is Congress or it is BJP, the budget deficits are not going to defer much. I don't know what hard decision the Congress has taken in the last five-years.
Market may not be neutral for the first three-weeks. It may be neutral after that because remember one thing what kind of government have you got after Narasimha Rao's from 1991 to 2009? I think every government acted whether third front, whether BJP, whether Congress in a similar manner. Whatever decisions are needed you just don't have them. At the same time I feel Indian democracy is maturing. Politicians are realising that the person who can bring growth is the person who is re-elected.
There will come a politician who will realise that the mantra to power is growth. How are you going to get the money for National Rural Employment Guarantee Scheme unless you have growth and unless you have taxation and you are not going to have taxation by raising the rates. So what India really needs is hard decisions, good decisions and the will to implement them and we are not going to get it from this government.
Bhanshali: I think over the last 15-17 years we have seen very different shades. It is entirely possible when I said that you have a nationalist kind of leadership within whatever combination. You could have a surprise like Vajpayee or a surprise like Narasimha Rao. I have spent a lot of time talking to people who are putting forward a possibility that you could have a weak looking government, a strong leader and a good government.
Unfortunately, in this country governance has become a fiefdom and you divide the goodies. There are some people who are happy running their own revenue departments and they are not concerned with policy. That is why when the Left is a part of the government or not is very important because that is the only party which has an ideological block. The rest are concerned with their own interest.
Politics is at the end of the day an art of the possible. It will always remain so. Sometimes you know how to take hard decisions in a manner that is acceptable to everyone. I think it is an unsung act, and that is the Electricity Act that Suresh Prabhu was able to do a financial closure of Rs 92,000 crore. He settled all the dues. He saw to it by passing the Electricity Act that no state government can give free power and several other things.
We would be sitting in dark halls by now but for the Electricity Act. Therefore he did it within a coalition government. He is a non-politician, from a small party like Shiv Sena. Therefore I think there have been many acts where intelligent people have been able to achieve a lot within noisy coalitions. Therefore I would think the best thing for the market would be still to get one of them. Whether it is a possibility or not is a different issue altogether.
Q: You have also written in your report that the market would frown at a broad coalition. How would you define a broad coalition? Beyond what number is it narrow or broad in your sense?
Desai: I think it is defined by the lead party. So, if the Congress or the BJP is not the lead party and it doesn't have say 150 seats then I think we get into a broad coalition. So, then you have many more parties with smaller numbers coming together. Inherently that is not stable, inherently that is a government that will find it difficult to execute.
Q: What about a Congress or a BJP with only 125-130 seats?
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Desai: I think that would also come under a broad coalition, a slightly better version of the broad coalition. But definitely not something which will satisfy the market.
Q: How do you think the markets will react if you got that scenario that leading party is 140-150, no more than that? And to get to 272 you align not only with the Left, which the stock market hates, but with Mayawati – an unknown factor – and with Jayalalithaa or either of two of these three. Do you think the markets will be very uncertain?
Desai: I think on May 16 we are not going to get a government from whatever I have heard over the last two sessions. It will take maybe 15-20-25 days and those 20-25 days could be hell for the markets. It could be hell for traders; the markets could be quite volatile. So, that would be the initial behaviour I think of the market.
After that, it would settle down into some range depending on what government is formed. And then it will I think ultimately depend on how the government executes. So, the first few policy announcements I think will really give the market direction.
So, as such, I think you may get a knee-jerk reaction post the election, then a bit of volatility in that scenario and then I think the market will wait for the first few policy announcements or how strongly the government wants to emphasise the economic situation and go forward.
Q: Which is worse from a stock market perspective, a government supported by the Left or a government that includes Mayawati in a big way?
Jhunjhunwala: The lesser devil is the second.
Q: Mayawati is the lesser devil?
Jhunjhunwala: Anything is better than the Communists.
Q: So you are saying NDA supported by Mayawati is better than UPA supported by the Left?
Jhunjhunwala: I think so.
Q: What if Mayawati was to be Prime Minister in that government?
Jhunjhunwala: It is all ifs. With 30 MPs you have dreams of being Prime Minister.
Q: What if she supports the UPA but exacts the price of Prime Ministership as a price?
Jhunjhunwala: That would be a small price to pay for this country. The country is far richer than her price. And the matters at stake are far greater than her price.
Q: So markets will be fine with Mayawati as Prime Minister?
Jhunjhunwala: Not Mayawati as Prime Minister but Mayawati as supporting.
Q: Which of these two is the worst possibility for the stock market – UPA supported by the Left or any government supported by Mayawati?
Bhanshali: I think any government supported by Mayawati would be more acceptable. I would also like to say that the market has many situations. Say the market has crashed for whatever reasons, even before results come, and then you have a government and then some policy statements start coming out. Some of the important portfolios are given to people that you think potentially can perform. The market may start reacting differently because the market has to make a price every day.
We are talking of scenarios rather than market reactions after the elections. For example, I would like to go back to Narasimha Rao. Narasimha Rao so to say was a Congress man. But what sort of base did he have in Congress? It is the art of possible again as I would say. I have seen scenarios that I cannot discuss where people say that it is absolutely possible that the regional parties can be given what they want and the country can go forward if you have a sensible PM.
Who knows if Mayawati is able to achieve her ultimate ambition of becoming the PM, how she will behave?
Jhunjhunwala: Who thought Lalu Prasad Yadav will get Rs 1 lakh crore surplus in the Railways? What surprises politically can happen that Mr. Lalu Prasad Yadav will preside over a ministry, which will be a matter of study by Harvard Business School. There is no joke, he has performed. Would you have ever imagined it?
Desai: There maybe some anchoring here because you have had an immediate experience which is probably not as good and therefore the markets may hesitate. The portfolios are very important. Who gets what portfolio will be more predictable under the UPA-Left combination, so we will know in advance that these are the gentlemen who are going to run those portfolios. The market will look forward for more deliberate action and more concrete steps than just a government formation before it actually decides to impose faith in such a government, so it may take time for the market to actually establish direction after that.
Q: Would that matter because regardless of the portfolios the Left didn't let the UPA government do too much over five years? Would it have mattered if the ministries were different?
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Desai: No, that's precisely my point. We know that these are the portfolios, so the market is not going to establish faith immediately. It will wait for a concretive action from the government, some steps that it takes to show that it can do it differently from last time and the environment is different. It is not 2004 when we were already on a growth path, and the global economy was booming. It was a very different environment and even in that scenario when the UPA formed the government with the Left the market was knocked down very badly. So, it may not get knocked that badly this time but it will take time for it to establish a base and then move forward.
Q: Which is the lesser devil: Is it a government supported by the left which we are seeing in the last five years which couldn't do much where the problem is the policy problem and not the stability problem, or is it the government which doesn't have the Left but has actions like Jayalalithaa and Mayawati which might make it inherently unstable and therefore not last the whole distance? What does the market worry about more instability or policy inaction?
Bhanshali: It is difficult to say one or the other. For example, the Vajpayee government lasted only 13 months. I think there are three scenarios where one is non-government and you don't know what to make of it. I would say that I don't see great governance, so it is stupid to think that something like that may emerge. I will be happy to be surprised if we have Congress and the Left gives us stability. It may give us a non-government or progress but it gives us stability, even that stability in the current context is worse than governments that attempt to do nothing.
We must put the whole of last decade in perspective. India was very fortuitous in benefiting from low interest regime that came into being in the world. We needed it and it came at the right time. A rise in commodity prices came at the same time. We had good combination of PV Narasimha Rao, the two RBI governors, followed by Vajpayee and a lot got done. So, nothing like that seems visible today.
The only thing that has changed in India over the last 15-16 years is the confidence of the Indian entrepreneur who now believes that he can make a quality product, export, etc. A lot of things were not there in the late 90s. But we have seen in the last two years that this entrepreneur has got carried away. They have done things as recently as in 2005 or 2006 that allows someone to make a good acquisition or borrow and so on and so forth. Therefore, we need a steady hand at this point of time for more than one reason. If you had someone who says, 'Alright, I am doing my best as a prime minister. I am ready to resign if I am not given my way'. If it is a reasonable way, then that would be lot better than a government which just lasts five years.
Q: So, you are saying that even a government which doesn't last the whole distance but does a lot for whatever period it can better than governments who does nothing?
Bhanshali: For example, in Japan there was a prime minister who took a decision to open post office accounts and so on. He wanted to do a big reform on it, he tested politics and his government fell. He later came back to power. This is very similar to Vajpayee's case. We need to move to the agenda of nation building again. A government that would start talking that language and who will start talking nation building agenda, whatever be the combination, has a good chance to come back.
Q: Do you agree with that?
Jhunjhunwala: All of them in their own way are saying we are building the nation. One problem is that it is divided house. I want to go back to earlier question. Lot of people are concerned about what is going to happen after May 16th. I will give my prediction. Go on a holiday from May 15th to May 30th. We are in one of worst recessions the world has ever seen but the markets have shown some kind of a bounceback. Technically the Indian markets are showing surprising strength. So I think most people don't want to participate in this rally because they fear elections results.
The fact remains that markets are rallying, people are not participating in it because they fear an event which is going to take place one and half months later. I think markets will rally before May 16th. On May 16th don't have any positions. Go for a holiday – I am suggesting you buy. It is market prediction – I deserve the right to be wrong. I have a disclosure to make. I am long on the market and I have interest in it going up.
Whenever a market has an event which is uncertain if the expected outcome is favourable prior to that event market generally go up after the event. Like what happened in 2004, the surprise was markets were expecting the NDA to come back. Here now day-by-day the opinion is forming that the UPA will not come back – all the pundits talked just now.
So what market has to do it will do before May 15. May 16-30 will be the highest volatility to stay away and because we are approaching an uncertain event with an opinion of a bearish outcome, I would not be short.
I could change my opinion. I also have one wish list that whatever government comes in power on April 1, 2010 to please introduce GST. It is the most needed reform in our taxation system and it can really take up our revenue collection and the complete ground work has been done.
Q: Do you agree with that assessment that the market rallies into the event to May 15?
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Desai: That's what it does actually if you go back to the four-five elections, the market tended to give you about 20 per cent in the three months to the run up of the elections so this market is already up that much. So that is what it does. It tries to build an optimistic scenario for the elections and then it has sold off.
Q: Can you position yourself for this event?
Bhanshali: A lot of answers are in the context of the question which are based on the outcome of the elections which is a bigger reality, the bigger reality is that prices in the market are towards the lowest end and in some cases they moved 30-40 or even 50 per cent from what we saw, the second big and most relevant reality to my mind is that there is a lot of liquidity in the world, either its already there and more is being created. So what else you need for a big rally in the market, for this liquidity to become confident enough to come into the risk markets that equities are and emerging markets are at a greater risk to the developed market and therefore we have to look at the election results in this context that they could have played a big role in creating this confidence that money starts coming to India in a big way and we know FII money is the momentum money and nothing takes away the bigger reality that the prices are low that Indian economy whether it will grow at 4.5 per cent or 6 per cent next year it's a matter of conjecture that it will grow and when the prices are low, sensible guys looking at the long term they definitely have an opportunity and a bias to buy and in all this volatility that may come because of the election results where people don't take a rational view, so what happens in the next 4-6 weeks is always irrational because people are cheering more but it may be more opportunities for people to buy and that doesn't mean that the market starts booming immediately in the next 6-8 months and that's what I don't see.
Q: You talk to a large number of global investors very regularly what would their reaction be. The global move keeps changing for the positive as it is now and a lot of people are sitting on cash and they want to buy equities in the next 2-3 month onwards. They see all markets and they see India. Do you think India's political outcome will play an important card in how much of that new money which is getting into emerging markets, if it does later in the years, how much India can draw in?
Desai: Right now investors are clearly of that view that if the election results are not favorable and if they are bad in our eyes then we will stay away from India. So clearly that is something that they are looking at.
Q: A UPA Government or any government supported by the Left would qualify in their eyes as a bad outcome?
Desai: Yes, that could be and it's hard to define a bad outcome. It could take different shapes but generally speaking that's a bad outcome and that's a government that may evoke a reaction that says lets stay out of India. However, that is subject to change because I don't think the market is going to follow one event and it's direction is not determined and it's a very complex animal. And there are a lot of things happening—there is a Geithner plan, growing confidence in America that it would be accepted and that will be the way forward and we are not sure about that. If that doesn't go through then this rally which is happening right now in global equities will get snapped and that will affect India and then there is the whole NPL in the banking sector. Day by day we are getting news flow which is not favorable and we will see how that develops. So, the election is an added element to the complexity to which the market has to deal with, a very important event. But that is just one of the important factors that is going to influence the markets in the coming months.
Q: Everyone is sitting on cash not just individual investors. Mutual funds are sitting on piles of cash, whoever we talk to are sitting on 25 per cent-30 per cent of portfolio and cash. Do you think they are waiting for an election outcome to put that money in or will that money get sucked in before?
Jhunjunwala: Someone is buying because the market is going down. We don't know who is or who is not sitting on cash but the fact remains on that we have had some 4-5 bear market rallies in the last few months. The breadth is very good. The gains in the market are spreading, so there is always an invisible hand in the markets. So who is buying and who is selling I don't know but the screen is telling me that the market has rallied and it's going to rally well. You might be going from the markets where you used to sell on the rise and buy on the dips. I personally feel and I have been optimistic in the last 3-4 months and some times I have been wrong— let me admit. So this rally has got some legs, breadth, volume and there is no participation. That means if we move higher, more participation will come. So it has got legs of a good rise.
Q: Legs till how long— 8,000-10,000 versus 25 per cent and 10,000-12,000 would be another 25 per cent. Good for that?
Jhunjhunwala: I personally feel the range of the Nifty in the current year till December, will be anywhere between 2750 and 4,000. I think 2,750 is the bottom and economically activity may still contract. I have never seen such pessimism and such uncertainty. So, we may not have a bottom economic activity wise. But we have surely bottomed perception and sentiment wise. The markets do not rally and without any reason. Nobody wants to buy and everybody is on cash and the market has gone too abruptly.
Q: We have nothing by way of disinvestment over the last five years. Do you think given our fiscal situation if the NDA comes with whatever combination or of the UPA comes back with the support of Left— this time they will have no recourse but to divest some companies. Do you expect that?
Bhanshali: You could have a Cuba like situation where the cars are atleast 20 years old. So there is no solution to ideological blocks. I don't know whether Left will change its position on that, the congress definitely wants to divest. So on a question of divestment, the NDA will divest. The congress wants to divest but even if Left realises that, they must make divestment but whether they will, I really don't know.
Jhunjhunwala: Chidambaram suggested that the government owns 14 public sector banks. We have central banks, state banks all competing with each other on the same street. So let's consolidate and reduce the number of banks and the Left didn't allow. Atleast they should have some program for the investment bankers.
Bhanshali: I don't know how they will do. It's not a policy issue for Congress or BJP. The expedience is unquestioned. If Sitaram Yechuri was with Left it would be a different situation.
Q: What can the government do? The market will not change only on the outcome of the result. But what action does the new government takes after the next few weeks after forming the government?
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Desai: if you go back to 1997— we still call it the dream budget, it was a third front government and it did a lot and that probably went down as the markets favorite budget. It's a different thing because we were in a difficult situation with asian financial crisis, NPL's and the markets were not doing that well. So it's not that its impossible for the government to do something. There is a lot of reform that can happen at the fiscal level; if you analyze the fiscal situation, because the revenue expenditure has gone up. So it's not because the capital expenditure has gone up; it can be rained in. Divestment or privatization is a critical element because one of the biggest expenditures for the government is interest costs. So they have that huge public debt and we have to pay that down. And we want to have the fiscal deficit fixed and if we want to spend constructively. So what you can do is direct your resources into investments rather than revenue expenditure. Those things are possible and they are not impossible. Rationalize tax and get GST in as it's a big revenue earner and things can start happening. It's not an impossible situation, it's a difficult situation. But a government with capability and willingness to execute can pull this off.
Q: In that sense do you think the market will be more receptive to an National Democratic Alliance (NDA) government in any form, which does not have the baggage of things which will crib its style?
Bhanshali: I see two things in the short-term the market can start rallying on any good news. For example, there is a Mayawati led government, which would try to frighten us quite a lot - but suppose she announces that we are signing Rs 1 lakh crore worth of orders today or in the next one week. I think one of the most singular and conspicuous failures of this government has been its performance on the roads and power that 78,000 megawatts not more than 30,000 megawatts will get added and in terms of roads very few contracts were given out etc. So there is a low hanging fruit, which the new government says here we show alacrity, we will show imagination, we start acting and the market will react to it.
Q: If Mayawati did that you would also know which stocks to buy? Bhanshali: I never talk stocks as you know – so anyway but whether it is sustainable those are single acts and single swallows kind of situation and that is a different situation. I would also like to supplement what Mr. Jhunjhunwala was saying a very interesting scenario that you are seeing is that the market has been in this bearish kind of mood for so long that lot of corrective action starts happening. The most exciting story about our market is the Indian entrepreneurs; they have not been sitting idle and to the extent that they are dependent on economy, low interest rates, real activity etc maybe nothing can be done and we will have to wait till maybe January, March when the economy starts picking up if everything else doesn't become terrible. But even otherwise the stock market could start reacting to the foreseen reality by September, at least six-months in advance the economy improving. I think there are many-many combinations and one would not like to say that the market is headed only in one possible direction.
Q: As Mr Jhunjhunwala was suggesting?
Bhanshali: I didn't understand fully.
Jhunjhunwala: I said the Nifty closed today at 3,060, I am saying the range of the Nifty in my opinion and I deserve to be right or wrong is between 2,750 and 4,000 for this calendar year.
Q: Not even 2,500 that is history?
Jhunjhunwala: I just making a judgment I am not saying that whatever I am saying is sacrosanct.
Q: I am asking what you think; I am not saying it is written in stone?
Jhunjhunwala: I am saying the range is 2,750 to 4,000 and neither may never come – we don't know.
Q: No, at some point they will come?
Jhunjhunwala: No, neither may not come - the range could be between 2,800 to 3,500 or 3,400 it would be whatever. One thing I want to add and explain to people I made my first fortune in life during Madhu Dandavate's Budget in 1989 because the market was extremely bearish then, the expectation was that they will give us a budget where they will raise taxes, increase rate of minimum tax on companies. There was such bearish sentiment and I was the lone bull and I bought and bought and I made my life on that day. After that I have realized that any event which is uncertain, expectation of that event prior to that event actually happening is extremely important. So, if we approach the elections with the idea that we are going to get uncertain government and Mr Bhanshali wishes to invest but he knows that he is not going to happen. I wish there should be some steps to have agricultural revolution in this country and I know it is not going to happen - that is the expectation with which all of us are entering the elections. So, even if the results are not going to be in accordance with what the market wants, I don't think damage is going to be so much as people are expecting.
Q: Is there any way to construct a election portfolio? I know you have attempted something like that in one of your reports.
Desai: For the time being we are advising our clients to remain defensive, not get aggressive. My range for the Sensex is even wider which is 7,000 to 15,000 by December. I think there are reasons for that because the market is still faced with a lot of uncertainty; election is only one of them as I mentioned earlier. I think this 8,000-10,000 band is going to be history. So we will probably break out of it. It is a low probability outcome but it is a possibility.
The portfolio I think that investors want to hold is one which is focused on companies with good balance sheets, with a reasonable cash flows rather than one which is on companies which have got aggressive balance sheets. We still have that problem to overcome, we still have an non-performing loans (NPL) cycle, we will see a lot of restructuring. There is a suggestion out there, investors are suggesting that maybe we should start buying companies with high gearing because the banks are going to fix them and some of the valuations of these stocks are attractive. I wouldn't get aggressive about this right now. I think I would stay in reasonable companies which have got a reasonable growth in the next twelve months and not get too adventurous with it; consumer staples, maybe pharmaceuticals, maybe a little bit of telecom.
Essentially I think focus on companies where you are dealing with a good balance sheets and good cash flows rather than getting aggressive about companies whose growth rates are less predictable in the next twelve months.
Q: What is the high risk portfolio in case the election outcome turns out to be a favourable one, either way? Which will then deliver?
Desai: I think you want to buy domestic growth, whether it is consumer discretionary or infrastructure, I think domestic growth will be the big theme. Consumer discretionary has already done well in the last six months, a big surprise for me, we never expected that to happen. But clearly the market is looking ahead and it seems to believe that growth is bottoming out and consumer discretionary usually needs growth. If you go back to 2003 and in that economic recovery cycle and the market recovery, it was consumer discretionary stocks followed by industrials followed by financials. I think it may not be very different. So again consumer discretionary industries will be the first two things you may want to buy.
Q: What is your most likely scenario?
Jhunjhunwala: One thing I want is that the communist should not be part even of supporting any government. The second thing is that a government which is led with 160 seats will have a more stable government. But it is my prediction that this election result is going to surprise.
Q: On the positive side?
Jhunjhunwala: We don't know on what side, just as results in 2004 surprised because you think of it - 1 per cent change of a vote can mean 20 seats .so it is going to surprise and being the eternal optimist that I am I think it is going to surprise on the upside. So I think either the Congress or the Bharatiya Janta Party (BJP) is going to get more than 175 to 180 seats.
Q: You think it is likely to?
Jhunjhunwala: I think it is likely but I don't know which one of them. Bhanshali I am quite sure third front will come third and I take a lot of courage from the state election results. They were the most sensible results you could expect. Good people came back to power, it didn't matter what age, what party. I think it is a misfortune that over the next month or so or a month and a half we are going to hear the cacophony that we just experienced and we are not hearing the common man. There are several new factors in this election, delimitation, lot of younger people, the percentage turnout is going to be higher, the issues etc and therefore I see an equal chance for NDA, UPA to be in the lead.
Desai: In a written research we have assigned almost equal probabilities to each of the three but if you put a gun on my head then I think the repeat of 1996 cannot be ruled out which is you get some third front parties come together and supported by either the Congress or BJP from outside.
Q: You think that is the most likely outcome?
Desai: I think so.
Q: What is your take on how long will it take for us to have a prominent impact on economy post the fiscal and monetary measures that need to be put into place?
Desai: I think it will depend on the global factors as well. So it is unlikely to happen before 2010, it will take a little while. I think the world is under a lot of stress, the Western world and it will take a while for them to fix it and to an extent they will be a part of the global economy, I think it takes time for us as well. We are not in that much of distress, we are not in balance sheet distress but growth surely will slow. I think recovery is only something that I think will happen in 2010.
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