After a dismal performance in 2015, markets started 2016 on a disappointing note. The fear of Chinese slowdown and the yuan devaluation are roiling markets.

Speaking to Bloomberg TV India, Big Bull Rakesh Jhunjhunwala shares his thoughts about the global economy and markets. The main reason why markets are panicking is the fear of the Chinese economy and some fear of economic growth tapering off in America although there is no evidence of it, he says. Declining to forecast a Sensex target for 2016, Jhunjhunwala says it will grow faster than India Inc’s earnings growth. Excerpts:

2016 took everyone by surprise. But I am not sure if it took you by surprise. But it definitely gave all a lot of jitters and spooked markets globally. What was your reaction? How are you viewing this uncertain period when it comes to equities?

I was least expecting this kind of a fall. The market has been brought down basically because of the fear of the Chinese economy and some fear of economic growth tapering off in America although there is no evidence of it. I was caught surprised by the fall… What caused (the market to fall) is mainly the stir of the Chinese economy. There is no real difference or evidence of real breakdown in the Chinese economy from the December 20 to this date.

Even as we look at the depreciation, the yuan’s depreciation is 5 per cent against the dollar in the last two years — it has gone from 6.20 to 6.50 to a dollar — while the rupee itself has depreciated 6 per cent against the dollar in the last one year and at least 15-20 per cent in the last two years.

So, I think, this is driven more by fear of what could happen if the Chinese were to devalue. But, in my judgment, Chinese are not going to devalue the currency beyond a point. So this is all about fear and apprehension. The fall has come. I was bullish. I remain bullish. But we have to respect markets. For the moment, I think we should step aside and let the fall absorb itself.

Banking stocks are hitting 52-week lows. What’s your outlook going forward for the sector?

India is not the only country having a banking crisis. America had the housing loan crisis in 1991. Sweden had a crisis. And in 2008, there were a lot of crises in western banks too. So, it can be handled once it is brought to the fore. It has to be disclosed, everything has to be known… Part of the crisis (in India) is that there has been a delay and in that delay you have greened the loans.

You go to infrastructure companies, he will say ‘yes it is a ₹5,000-crore loan’ — it was a ₹2,500-crore loan four years ago, it did nothing and the bank charged interest at 16 per cent, paid him money to pay their interest. But had it been handled at an early stage, the problem would not have been as severe as it is now.

In India, it has not occurred to us that entrepreneurial assets are lost when bank loans are not paid. They always were restructured in such a way that whether the bank loans were paid or not, the entrepreneur would escape. That attitude has to change. The equity value of those assets will have to become zero. It is going to happen but it will take time. We still have time to defend — that I will make a restructuring, I will do this, and finally you will have to see that the equity value is zero. Suppose an asset has a loan of ₹10,000 crore, the asset is sold for ₹8,000 crore, its equity value would be zero. But it is unheard of in India that the entrepreneur should lose his assets.

Is consolidation in the banking sector evident over the next couple of months or quarters?

Consolidation depends on the government which is the largest owner. The unions have thoroughly opposed it. I do not think the government wants to challenge the unions. So, I don’t think there is going to be any consolidation.

Do you think that things are going to get a lot worse before they get better?

They won’t get worse in terms of NPAs. But they will get worse in terms of declared NPAs. I mean those who are recognised and those who are not, both are together. Things are going to get worse in terms of how the truth will be known.

I remember talking to market participants probably two years back and they were saying avoid PSBs and look at private banks. But are you now saying it is all the same and one should avoid both private and public banks?

Without talking specifically about any bank, I think most Indian banks have this problem except two or three.

What is your Sensex target in the next two-three years as many reports say 2016 might be the start of a recession?

I don’t set any targets especially for the Sensex as I don’t own the Sensex. If you have a continuous year of earnings growth, then I think PE growth will also come. I would say that the Sensex would grow better than earnings growth depending on what earnings growth will be.

How to balance trading and investment strategies?

What we invest in, we try to predict the earnings on a continuous basis and try to find a mismatch between valuation and growth in profit we are ready to expect. It is not for one-two years but for four-five years. Trading means leverage. I won’t advice people to leverage investment. Don’t make your trading bets your investment goal. I would say don’t trade because if 10 lakh people come to the market, very few make money out of trading. But people find trading exciting.

What would be your trading income as compared to total income and how important is trading?

Trading is the mother of all my wealth. I make money in trading as I had no capital with me. So, it is primarily money from trading which has allowed me to invest. So it is extremely important here.

How do you identify the time to exit from a stock at a point in trading or from a stock itself or from a unit of any derivative?

When I exit trading, either the commitment is extremely high or a valuation which is not sustainable. Typically, you don’t exit by judging yourself. You wait for a stock to make a top, then come back and then make a lower top. And because we have no written book or rules, it is very difficult for us to spell out how we do a thing. We do something by seeing a screen. Now what goes on in my mind and how I decide, is very difficult for me to point out at that point.

I exited all my trading — nearly 95 per cent of my trading positions — last February and March because I felt the market is over-expecting; it was highly committed and so the market will be disappointed in the short term. So in February-March I sold all my trading positions.

I did not judge an individual position but I judged the market in general. That doesn’t require much sense to understand. This is a bubble. So at various times you get various reactions to it.

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