Rakesh Jhunjhunwala became a billionaire stock investor because of his incredible ability to be able to anticipate the future. He made this clear in his classic stock market discourse “In equities, the key lies in predicting what tomorrow is going to be. The tomorrows are going to determine the equity prices. We can’t see tomorrow; but we can anticipate tomorrow“
Rakesh Jhunjhunwala made two significant stock market predictions in his interview with the ET in June 2011. He made one short-term prediction and one long-term prediction.
He predicted that in the short-term, the stock market would go through a tumultuous phase. “The next three months are going to be very difficult for the stock markets” he said solemnly with the sagacity that only real wisdom can bring.
Rakesh Jhunjhunwala was perfectly correct in his short-term prediction. At the time that he spoke, the Nifty was sitting sanguine at 5560. On Friday, 5th August 2011, the Nifty was down to 5211 and the carnage seems to have just started. On Friday itself, the Nifty plunged 200 points and ended up about 2.5% poorer.
The savage fall in the stock market indices sent all stocks reeling – from blue chips to mid-caps to large caps – no scrip was spared – just as the Oracle of Mumbai had predicted!
The reason for the savage sell-off was the downgrade of USA from AAA status to AA+ status by S&P rating agency – an event that was not even on the radar when Rakesh Jhunjhunwala made his incredible prediction.
Now, the billion dollar question is whether the master investor’s second prediction would also come true.
His second prediction is that the golden period for the Indian stock market has not even dawned meaning thereby that there are rich pickings on the anvil for the brave hearted who are prepared to face the tumultuous turmoil to pick up stocks.
Rakesh Jhunjhunwala did not want to leave anything to his disciples’ imagination and so he sent out the clarion call to investors to buy stocks by saying “I am extremely bullish in the longer period”, “the Indian markets will have a very strong ride” and “the golden period for Indian equities has not even started” (see Rakesh Jhunjhunwala Says Buy Stocks Now!).
Rakesh Jhunjhunwala always leads by example. He would never ask his disciples to do anything that he himself would not be prepared to do. Rakesh Jhunjhunwala put his money to work and while every other investor was covering with fright, he braved the storm and bought huge chunks of Development Credit Bank (see DCB: Rakesh Jhunjhunwala’s latest stock pick) and Sterling Holiday Resorts (see Rakesh Jhunjhunwala’s New Stock Pick: Sterling Holiday Resorts).
If one thinks about it, there is compelling logic in Rakesh Jhunjhunwala’s predictions and in hindsight one should have seen it coming. The USA and the other European countries are laden with debt and are living way beyond their means. It was only a question of time before the lenders came calling and demanded their pound of flesh. The downgrade of these economies was imminent.
The logical corollary to Rakesh Jhunjhunwala’s first prediction that led to the downgrade of the USA is that the USA (and European nations) will, in order to keep up their borrowings, have to pay higher interest rates since they can never get the cheap rates that their AAA status permitted.
Rakesh Jhunjhunwala knows as well as anyone else that higher interest rates in the economy spells doom for the stock market because the cost of manufacture and production goes up, margins shrink and profits plummet. As this will happen in the developed economies, all monies will flow to the developing economies which of course includes India. Also, if the global economies start slowing, commodity prices will soften. One can already see this in the prices of crude oil which have plummeted.
If commodities prices soften and inflation comes under control, the RBI will loosen its vice-like grip on interest prices. If interest rates in India start declining, it will spur demand, lead to increased production and a surge in corporate profits. This augers very well for the Indian stock market.
The result is that while the interest rates in the USA and the developed economies will increase, leading to a flight of capital from the stock markets, the interest rates in India will decrease, leading to a surge of inflows into the stock markets.
Ah, now one knows why Rakesh Jhunjhunwala said “the golden period for Indian equities has not even started”
Another verse in Rakesh Jhunjhunwala’s discourses should never be forgotten by his disciples. He always says that investors should react at the cusp of change because that is where the maximum gains are to be made. When inflation is about to raise its ugly head, the smart investor should anticipate that interest rates will rise, sell the rate sensitive stocks like Banks, Autos and Infra and buy defensive stocks like Pharma and FMCG stocks. Applying this theorem, now we are at the other end of the spectrum when inflation appears to be cooling down (thanks to the falling commodity prices). Investors should now “see tomorrow” by anticipating that interest-rates will soften and slowly but surely buy rate sensitives like Banks, Autos and Infra stocks. These stocks are presently available at rock-bottom valuations. While the downside is restricted, there is immense upside to be gained once the interest rate cycle reverses.
Rakesh Jhunjhunwala Stock Portfolio 2011