This time the markets expectations have been very low going into the Budget. There has hardly been any action or any meaningful buildup before the Budget. May be memories of last time lingered, where the Budget did pretty much nothing. The market sort of sulked after that for a bit. But this time there has been no run-up. The Nifty is stuck in the middle of a trading range. The material point is whether the Budget can do something that nudges it out of their trading range, hopefully on the way up or on the way down.
Trader and investor Rakesh Jhunjhunwala does not expect Finance Minister P Chidambaram to do anything that is going to damage the markets really. He feels some of the excesses in the markets have been cleansed.
Samir Arora, Fund Manager, Helios Capital, said said the Budget is going to be immaterial beyond one-two days, unless there is something done which directly impacts the stock market.
Ramesh Damani, Member, BSE, said March will be a challenge for the markets. However, in April, the markets will start looking better.
N Jayakumar, CEO, Prime Securities, feels the Budget will be pretty much a non-event. “Other than a surcharge, I really cannot see anything coming out which is materially different,”
H P Ranina, Advocate, Supreme Court of India, said that the FM is not going to do anything substantial.
Excerpts from CNBC-TV18’s exclusive interview with Rakesh Jhunjhunwala, Samir Arora, Ramesh Damani, N Jayakumar, and H P Ranina:
Q: How do you find the markets going into the Budget? Do you think it is at a juncture where the Budget can be material and tip it out of a range?
Jhunjhunwala: I am personally quite confused. We have come out of a place where some of the excesses in the markets have been cleansed. There is extreme fund raising and promoter ambitions have been contained. But we are still in the shadow of international factors. A large part of the leveraged positions have been sold out. There are very few leveraged positions in the market. Despite all the pessimism about the international factors, markets internationally seem to be gaining. Europe is up in the last 25 days, America is up, Brazil is on the verge of a new high. So, I don’t know. In the last 4-5 days, the markets have been extremely sleepy. But there are expectations of a very populist Budget. Knowing Chidambaram, I don’t think he is going to do anything that is going to damage the markets really. I would say it is a difficult call to make.
Q: This time there has not been too much by way of expectations. Do you think it can do anything or it will just be a non-event?
Jayakumar: Forget expectations, for most of us the fact is that there is a Budget tomorrow is big news. Coming back to populism, I think in the age of coalition governments literally every Budget that you present could be your last one. By definition, therefore it has to be populist because you never know when you are going to be elected again, if you will. If you were to take that, there is a bit of populism in every Budget, there is no question of that.
I do not think there is going to be anything dramatic. Budgets by and large for the last four-five years have been pretty much a non-event, as long as there is nothing to derail it one-way or the other. The problem is when Finance Ministers believe that they can actually dramatically alter the course of history. We have gone way past those kind of either statements or expectations of the Finance Minister.
We are going to have pretty much a non-event. There will be tinkering around here or there. If the tax payer, who has been disciplined be it corporate or individual, has given more to the government than what the government has expected, as the collections indicate then pretty much, I assume that something will be given back in the form of a surcharge or otherwise. Other than that, I really cannot see anything coming out which is materially different. Yes, there will be complex calculations because Chidambaram now is famous for those read between the line kinds of Budgets. There will be a lot of that which other people maybe able to better interpret. But I think there is nothing really that is going to be of interest.
Q: What do you think? Is there any material at all which might be important for the markets direction?
Arora: Last year’s Budget was quite bad in terms of the market impact. The market fell 4% on the day of the Budget. After that, it didn’t really matter the next day. So, the point is that the Budget is going to be immaterial beyond one-two days, unless there is something done which directly impacts the stock market like removing some Mauritius angle or introducing capital gains on stocks outside the 500,etc. Populism on its own, unless it’s turned beyond limits, will not really matter beyond half an hour.
Q: How are you feeling going into the Budget tomorrow?
Damani: Its both good and bad news. If one looks back, Brazil is at a new high. Pakistan made a new high despite the violence in the country and Indonesia is on the verge of a new high.
The trouble with India is that there has been a lot of excesses in the IPO market and into a lot of sectoral themes in India. Those excesses are not still rung out and global liquidity is now approaching to be a challenge. So, it seems that the month of March will pose a challenge for the market. Typically, it’s a tight month for the market. Advance taxes have to be paid. In April, the market will start looking better. But looking at least one month ahead, it looks like it’s a very tough market.
Q: Should one expect anything by way of direct capital market taxes, which the FM may tinker with, which might make the market a bit moody?
Ranina: No, he will start his Budget speech tomorrow by saying that this is a Budget for consolidation. So, he is not going to do anything substantial. But my worry is that the members of the CBDT may prevail upon him, to make some changes in the capital gain tax structure. They might say that those companies which are not listed on the stock market should not have the benefit of the long-term capital gains tax exemption or a 10% concession rate for short-term capital gains.
This seems to be the indication that he may confine these advantages or exemptions only for listed stocks. So that could, in a sense, rattle the market to some extent.
Q: You expect to hear anything along those lines, Capital gains, STT, any direct capital markets tax which might sour the mood tomorrow?
Jhunjhunwala: To my mind, we have a tax collection this year projected to be what our tax collections were 3 years ago. So having this kind of a growth in tax collection,no finance minister’s right mind would like to make changes which are not going to really make much difference. My judgment is that he is not going to tinker anything, I think he will give some concession in direct taxes to individual. But it’s my personal opinion that if we reduce corporate rate of tax collection, it will not work so much. But if you reduce the individual rate of taxation, the collections will work dramatically. This may not be his last budget, and public memory is very short, so he could come in for a voting account in January. So all the goodies and freebies he would like to give to farmers and everybody, he might like to give it in January and I think even if he wants to give these freebies, his revenue collections have been so high, that I think there is space to do it and if we go by the track record of all these 6-7 budgets he has presented, I don’t think he has done something silly. He was the guy who removed the dividend tax, so I for one feel that this apprehension that he is going to give a Budget which will be populist and do things, So I for one feel that it’s not going to be a negative Budget, how positive it will be and how much it can revive the market is difficult to say.
Q: Two months back, there were expectations that because of the robust tax collections, there will be cuts but as we approach the event, I think those expectations have got considerably diluted. You still think that he will do something like may be take the surcharge away and cut individual taxes etc?
Damani: The two things that he might do, because at the end of the day every Finance Minister wants his legacy and he knows that the markets and the country looks at the Sensex to decide how the Budget is. So he won't do anything dramatic to upset the market, so he shaves off the surcharge. It’s a painless thing to do. It is not really needed at this point and I think what he will do is actually raise the tax slab - the minimum exemption that you get which should be great because it would slurp a demand consumption in India, so I am expecting those kind of two things to be done - the shaving of the surcharge and raising of the minimum tax limit.
Q: What's your take on the backdrop? How do you find the markets now as the event may come and go without too much of an impact as you said but broadly how do you see the markets position now?
Arora: Just before that what Ranina is saying about putting taxes on unlisted companies, I don’t think the stock market investors will care about unlisted companies capital gains if at all that is done. Talking about the market, look at the original research that is done on your channel that somebody relates the abysmality of India to the stock market and says because India is in abysmal country therefore to fall 20%.
If that kind of deep research is done by the markets in general and investors in general, you can see that the bearishness and pessimism is at all-time high and I think the whole country and its citizen should be happy to note that this month, India was 3% less abysmal and for the last one-month, it was about 8% less abysmal than it was on that day.
The point is that people have found new reasons to be bearish on India, so lets look at the original source. The US is in recession and the US is having problems and the US financial companies are having problems because they have to write down subprime loans and credit card loans and whatever mortgage loans but the thing is that in US, if you look at the financials in US, Bank of America, JP Morgan and few other stocks in there in the financial sector were actually up for the year.
If you look at Citibank, which is sort of a representative of the biggest problems that are happening in the world or in US, it is down less than India’s down. If you look at the other stocks in US like retailing, housing, Wal-Mart, home depot, Maycee’s, they are all actually up 5-10% this year i.e. from December 31 which is two months and whatever Indian analyst and Indian strategist think about the next corporate results and that the financials will have write downs, somehow the US market itself is missing all that. So I think India’s sort of taken upon itself that it should worry about everything in the world and you have this book for children called ‘Miss Worry’, I think that is what should be applied to India right now.
Q: You agree with that point of view?
Jayakumar: We have had several people, these I consider as the oldest bastions of the bull market, who one month back came and talked about a 25,000 market. India is not even a developed market, it is a developing market and country. What has happened is somewhere along the line. The fact that there are no highways or bridges was known six months ago or three years ago, it is not necessarily known only one month ago. The issue here is that somewhere along the line we have taken it upon ourselves to worry more about these issues. It is a joke in our office that at 4 pm everyday they click on to a Bloomberg’s Eco-US page to figure out what economic indicators in the US are going to be release that day. It is unbelievable.
Why do we look at Eco-Venezuela, Eco-Ecuador etc? Then, we should worry about other things as well. So, the bottomline really is that if the epicenter of the problem is the US and that is down 4% for the year -- the backyard of the US is Brazil and Mexico both are between 2.5% and 3.5% for the year and in dollar terms are up between 7% and 10% for the year -- then you go to Europe which is the sort of at the next level of being affected and that is down between 8% and 12%, and then you look at India which was the best performing market a month ago.
It is the disenchantment of things that have happened a month ago that have rubbed off to such an extent that from one month ago being the best performing market in the world, we are today sitting and being the worst performing market in the world other than China, which essentially means that excesses have got cleansed on the other side.
So, perhaps the excesses have got washed away. It has come on the back of a fair amount of excesses in the IPO front. While attempts to rectify that have happened, the real issue here is that when it is good, it is very good and when it is bad, it is horrid.
People are saying that everything about India is bad. People who have been long-term proponents are finding reasons to be more bearish than you really need to be. Maybe the excess is happening. It is not a cheap market, but it was never a cheap market in the entire bull-run. We were always ahead of the curve and every single bulge bracket firm today comes out and gives you reasons why they must de-rate India.
So, it was a synchronized buy on the way up and it was synchronized sell on the way down. There are four contrarion indicators. The Merrill Lynch Fund Manger worldwide survey, completed two weeks ago, indicates that people are overweight on cash higher than they were in 2003.
It indicates there is the greatest level of skepticism higher than 9/11. In India, promoter action, in terms of creeping acquisitions and buybacks have increased. The outstanding positions are lower than what they were in May 2006, when there were a higher number of stocks in the F&O and the index was half the level of today.
Apart from all this, the IPO market is virtually shut except for the real worthy. People have been butchered out of the market. The bottom may not be a v-shaped recovery, like in the past. It may be a gradual base formation which is what we are going through.
Q: Do you agree with the optimism of Samir and Jayakumar that there is too much pessimism from which a rally could have its genesis?
Rakesh Jhunjhunwala: We could have a rally, which I wouldn’t rule out. But I don’t think we can be as complacent as we were in the earlier years and that we are going to see new highs with so much ease. I certainly don’t agree with Jayakumar, what about the promoter action that was going on in the market two months ago? Who is going to pay for that?
So, I don’t think the markets are going to cleanse themselves and go into new highs as easily as they have done in earlier years. I for one believe that the long-term India bull story is very much alive. But there is going to be a pause because you cannot run a race from 1 km to 100 km without taking a pause and consolidating. As a long-term investor, I am very much satisfied even if the market doesn’t go for a year. So, be it. I think this will be a healthier market.
I don’t buy all this that just because India is going to do economically well, and because Brazil must go up, India must go up. Brazil is a commodity related market. Commodities are going through the roof worldwide. So, I am myself confused, I don’t know what is going to happen.
I don’t know if to break 4900-5,000 is going to be difficult, to go above any new high is going to be difficult. I think we are going to go in for a consolidation phase. I am not as bullish as sure of a rise and that markets are so pessimistic as Jayakumar is. Certainly there is some pessimism in the market but there has been greater pessimism at times.
Q: Do you think a retest of 4500 or the January lows is possible?
Rakesh Jhunjhunwala: In markets, anything is possible. If China is a guide it is certainly possible, because China has broken into the December and January lows. But I don’t think that is going to happen easily.
Undoubtedly there is not much leverage purchases in the system. I don’t think there is much commitment in the market. People are pessimistic to some extent. But the market is showing no strength whatsoever on the screen, maybe Mr. Chidambaram can change sentiment, I don’t rule it out. So, I think I would like to live by the day rather than to be too sure of where markets are going.
Samir Arora: Rakesh Jhunjhunwala has had a live example of what Jayakumar was talking. Rakesh says we should not look at Brazil because it is up, but India might go down, because China might do something. That is the whole idea. We are benchmarking against anything that is going down.
Rakesh Jhunjhunwala: For Brazil, there is also a China. So, we cannot say, if China is going to a new high, we will go to a new high.
Samir Arora: Let’s look at what are the issues that are facing our markets right now. First of all to say that it won’t be like last year is not a great thing to say because obviously last year the market was 70%. So, to say it is not up like the year before it has no value. The value is, will you make more than the 8% or 7% that you get in your bank or in your mutual funds for fixed income or whatever. That is the whole idea of choosing between equity and debt. It is not like, will you make as much money as last year? No, you will. Even I agree.
But let’s look at all the problems that we are facing today and saying that they are problems of our market. Firstly, foreign investors are not buying.
Secondly, retail investors are not buying. Thirdly, IPOs are not going through.
In December, foreign investors were buying, retail investors were buying, IPOs were getting oversubscribed 100 times. So, where did that lead you one month later. If the simultaneous presence of all these factors in December could not give you returns one month out, why has the absence of these factors taken such a big deal? Do you think the world will wait to see if some high networth guy in India has the confidence or not? The bottomline is in the month of February, the market is up more than 3%, which I think in any definition is a good return for this month. So, why are we thinking beyond January that India is not going anywhere? 3% is not a bad return at a time when we all think that it is not doing anything. The market does not have to go 40% to call it a bull run. If it does better than its alternatives for the retail investors in India, it is a good enough reason to be in equity and then it takes on from there.
Q: What is more likely as an outcome from here? Will the index climb the wall of pessimism to 20,000 plus or go back and re-test 15,000?
Ramesh: It will test the January lows. It was an important low market and it will test that. Markets are looking ahead and not backwards. If you see the raw inflation number, gold is at USD 960/oz signaling strong inflation ahead.
Two days back, wheat futures rose 22%. That sent shockwaves to the entire world, because food is a very important component of an inflation index.
Metals are all rising. Generally, in periods of inflation, markets tend to do very badly because corporate profits and margins are all impacted. So, one theme that will emerge out of 2008 is the policy regulation with inflation. If the Fed is going to reduce interest rates, inflation will stock up in America again. So, that’s a real problem in equity markets ahead.
In the F&O market, you need the retail guys to bring froth to the market by a few hundred shares. Because of what has happened periodically in our markets, every 12 months or 18 months, he has been desperately wounded. Inflation and domestic investors subdued will lead to perhaps a subdued market.