As a retail stock investor, I found the pessimism among my fellow retail investors quite inexplicable. So many fundamentally solid stocks are well off their intrinsic values and yet, they seem to find no buyers! After doing a bit of research into whether I was missing something, I found this interview of Rakesh Jhunjhunwala. Apparently, he too shares my confusion! But his claims that this is one of the best times to buy equities got me excited about it and I thought I should share it with our readers. The interview dispersed pearls of wisdom, which reiterates the fact that disciplined investing into good fundamental stocks reaps long term benefits for retail investors.
One of the Best Times to Buy Equities:
When the ‘Big Bull’ speaks, everyone pays rapt attention, and I too got absorbed listening to his keen observations about the stock market, the macros of the economy and his sectoral views.
Reflecting on the possible causes of pessimism in the emerging markets in general, low commodity prices and basic structural imbalances (especially in China) were cited as the reasons for growth moderation amidst high expectations. Calling US as ‘economy on steroids’, he mentioned that the hyped recovery in its economy, as shown by improvement in housing sector, is not backed by the savings and earnings growth rate, making it less real and less sustainable. Though unemployment rate in US fell to 7.4% in first half of 2013, quantitative easing is not expected to end any time soon. However, the quantity of bond purchases might be reduced.
Let’s hear it in his own words!
His proclamations about the Indian markets, though, were quite optimistic and were validating my line of thought. The depreciating values of the Rupee, exit of FIIs and low corporate earnings have impacted the stocks without a doubt, but the fact that the Nifty has not cracked the psychological 5500 barrier, is certainly a cause for some cheer. Commenting on the good monsoon and improved agricultural production in FY 13, his belief in the macro-economic prospects of the Indian markets remains strong. He shared his belief that some stocks are receiving ridiculously low valuations. So low that even if uncertain macro-economic conditions are considered, they appear to be ‘chori ka maal’.
Given how far off their intrinsic value these fundamentally strong companies are, it wouldn’t be too much to expect a growth of 17-18% CAGR from the Indian markets over a period of the next 7-8 years. In his view, the Indian retail investors should, in fact, go head-on into the market and pick fundamentally strong stocks for the long term at these ‘chor bazaar’ rates.
Talking about the potential upside, he said that it is quite possible of getting even a 24% CAGR on solid stocks – with the assumption that the macro environment might cause some short term pain to investors.
When asked about his views on specific sectors, Jhunjhunwala said that he is extremely optimistic about the pharmaceutical sector for the next 10 years. He also felt that investors need to revise their expectation from the IT sector. Since the sector has now ‘matured’, even the Rupee depreciation would not be able to push the returns of this sector beyond 12-18%.
Regarding the Banking sector, especially PSU banks, he said that investors need to choose their picks carefully, keeping in mind the fundamentals of individual companies. India is a fairly unbanked country, thus, huge potential for financial inclusion points towards good growth expected from banking sector; and going by the valuations of PSU banks, there is a lot of money to be made on those in the long term as well.
Regarding the current account deficit (CAD) issues, India is currently reeling under; all the possible measures are being taken to reduce the import of gold. Recent RBI regulations on gold import have therefore, impacted Titan Industries. When asked about his crown jewel, Titan Industries, which forms a decent portion of his portfolio, he shared his optimism about the stock despite the short term pessimism hovering around it. He claimed that while Titan might post low ROCE numbers, owing to a high capital employed, but the overall ROE will still remain high. What remains to be seen is if Titan can pass on its high interest costs on to their customers.
The message from the ‘Big Bull’ is loud and clear to me. This is hardly a time for pessimism. On the contrary, investors should be going head-on into to the stock markets as from these valuations, there is no way to go, but up. The key message is to have a 5 year horizon and be ready for some short term pain. But investing in good stocks at these levels will certainly give solid returns in the long term – provided investors are willing to assess the risks associated with investing in stocks and picking fundamentally strong stocks.
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