http://www.moneycontrol.com/india/news/market-outlook/sensex-may-fall-to-13k-atmost-nimesh-kampani-/10/10/298461
The Indian markets broke through 14000, then went to nearly 13800 and almost reached 4000, on Nifty cruising through the 200 day moving averages. But from there on, most markets started recovering.
It was a mindless sell off that happened, led by the Yen and a lot of short covering followed. What kind of flux the global situation will be next week, starting tonight in the US markets is not known and course how much money still remains to be withdrawn from most of these emerging markets including ours remains to be seen.
Nimesh Kampani, Chairman of JM Financial feels that the technical situation is extremely bad as people are looking at buying only when market recovers. He adds that only short-covering is providing some support and feels that Sensex will fall to 13000 at the most, which can be buy at that level. Credit crisis will continue and US recession is likely by Q4 of this year,he says.
Kampani feels that a lot of west Asian & Japanese investors are keen on investing in India.
Bhanu Baweja, Head of Research & EM Strategy at UBS sees more pain coming into the markets. He feels that the credit crunch, lack of liquidity are the main issues. He adds that the markets are in grip of panic-selling and risk reduction through volatility has been declining due to overall corporate deleveraging. Bhanu sees tremendous value creation is happening and one needs to be cautious at current levels. Fundamentals not having any impact on markets, he says.
Excerpts from the exclsuive interview with Nimesh Kampani and Bhanu Baweja:
Q: What is your sense, we have had a short covering rally? But are we anywhere near the end of this pain or do you think there is more to come?
Bhanu Baweja: I think unfortunately there is more to come. This correction is about words, it is about credit worthiness and about lack of liquidity. Obviously over the last three or four years, we have seen immense amount of liquidity floating around in the system, volatility has been declining for a very long time and real money has been extremely happy to buy global stocks, in particular the emerging markets stocks.
The correction in volatility is usually very abrupt and that is exactly what we are seeing now. As volatility continues to scream higher, we are seeing portfolio managers having to reduce risk on a war basis. It means that we should see stock selling going on for a little while longer. We must remember that the epicenter of this is in the credit market, it is not in the equity market. Equity market is just following the credit market. I think the problems in the credit market are not over. This is not about fundamentals or about P/Es, it is not about growth. This is about credit worthiness in the credit markets and problems out there are still not resolved. So, I am afraid it has a little bit further to run. I think there is tremendous value creation going on right now. So, there will be a very good time to buy, but it is just not right now.
Indicators that we need to look at are in the credit market. There are swap spreads and commercial paper issuance of corporate bonds in the US. When banks feel happy to lend to each other, is when the calm is going to return and the panic is going to subside. Only then can we speak about fundamentals. Right now is not the time.
Q: What is your sense? Do you stick to fundamentals at a time like this or do you agree with the view that the global situation has not yet cleared out and we may not have the seen the worst of it already?
Kampani: In this market, when the technicals situation of the market is extremely bad, the fundamental is forgotten by the traders and investors. Everybody then looks at the market and they feel that market is always right.
In this situation, people normally look for when the market recovers as they would like to buy stock. People only correct their situation where there is short selling or long positions they want to correct.
Bhanu rightly mentioned that this problem of the United States of America and other places where subprime issues as taking a fairly big toll on the market. Credit was hugely available and everybody was saying that there is a lot of liquidity everywhere.
But people did not realize that this credit was going to various funds and they were doing a huge leverage. I know of some of the funds that have done a leverage of 1:4 and when you are four times your equity as a funding and when the equity markets start falling, everybody will call for a margin call. This ratio of 1:4 becomes 1:5 and 1:6.
At such a time, Goldman Sachs put in USD 3 billion of equity to maintain their equity position. If you cannot do that, you have no choice but to sell your stock. If you see the Indian market, most of the stocks sold are in the "A" group of securities or Sensex stocks or Nifty stocks.
This is mainly because these banks, which are lending money, also want liquid stocks. Therefore, the midcap in India is not affected yet at all, because there may not have been a borrowing against the midcap stocks and those stocks may not be in the approved list of the lender. Therefore, when the credit is becoming tighter and everybody wants to withdraw their money, there is naturally no choice for the fund manager but to liquidate the stock to restore the liquidity.
Apart from that, the crisis was not only in India it was everywhere else. It was in US, Europe, Asia and therefore whichever the liquid market is there they will liquidate the portfolio in those markets where in other markets where the liquidity is not there, they may not be able to sell the stocks. So I think they will come to India and stall some of the stocks, which happened to Hong Kong but Hong Kong also recovered.
It is a world over crisis but I think whenever there is adversity, it is an opportunity to also buy stocks and those who are long term investors, I would recommend that I see an index going down maximum to about 13,000 in a short run and therefore looking at 13,000 as a stop loss, one should buy the stocks around this level thinking that market can go down further.
You can't buy everything at the bottom price and sell everything at a top price. So overall the market is choppy, which is going to be volatile but some of the mutual funds in India who has been liquid institutional investor in India who are liquid may consider buying the stock and today the recovery also suddenly came in the afternoon session where we saw a recovery of about 300-350 points from the bottom. So I think next 1-week is very critical and important. One should be careful but I see very clearly that US can go into recession by Q4 if this thing continues because this is like a virus. It has spread among lot of funds and banks and lot of people are going to get affected and I think we will know this in this a month's time.
Q: One of the elements that was responsible for the panic today, the yen going to almost 112, how much havoc is it playing with the system, because we keep hearing opaquely about the unwinding of the carry trade. Do you think that is one of the central problems with liquidity now or is it overblown?
Bhanu Baweja: Well, it is a fundamental problem not just in the equity market but also in the bond market and in the credit market.
Japanese retail investors through Japanese investment trusts have bought a huge amount of foreign bonds, and increasing amount of foreign stocks as well. For a very long time they only focused on the interest rate differentials and the dividend yields, and all of a sudden they have become very aware of the foreign exchange risk and they started with the New Zealand Dollar going down in which they have a lot of investments. If you look at the Kiwi-Yen, it makes for a very depressing chart over the last 3-4 days.
Now I think this has got further to run. I completely agree that there is fundamental value in emerging markets. In fact, emerging markets are just about 10% away from becoming single digit in terms of P/E valuations. I am not talking about India, India is higher than that. But emerging markets, in general, are actually very good in value terms. So, for a very long-term investor, yes this a good time to look for a buy, except that I would not be very comfortable saying that 13,000 or 13,500 is a buy, and the reason is, this is not the time where markets are selling on a fundamental basis. As I said earlier, this is just not about fundamentals at all. This is about the liquidity problems not subsiding. We are speaking to the ECB all the time, we are speaking to quite a few central banks who are actually genuinely worried about the commercial paper problems; about the inter-bank money problems in the world right now. Now they are not likely to bail them out.
So, it could be a little while longer for the pain to persist, except that I do think that towards the second half of September, possibly October, would be a good time to get back into this market, but really we will have to see.
In terms of Japanese retail, I think this is just about the beginning of their unwind. I think they can unwind further. They are still sitting on some profitable positions. But I think the flow of capital out of Japan would have slowed down. They do not invest in the Nikkei massively, but when the Nikkei declines, they feel more risk averse and they bring down their investments abroad. So, I do think dollar-yen downside risks are high, I do think global emerging market equities including Indian equities could come under a lot of pressure because of that. I do think - for the short term, it is not a very good time to buy.
But I want to emphasize this point, global emerging market fundamentals especially India's fundamentals are extremely strong. If you look at how the rupee has performed against everything else, it has outperformed although it has gone down against the dollar, against every other Asian currency it has done relatively well. Certainly against currencies in Eastern Europe, and Middle East and Africa, Latin America, the rupee looks like a safe haven. So, India's investment to GDP is going higher, India's capital spending is going higher. These are all fantastic long-term stories. I am bullish on Indian growth and the rupee in the medium-term. But in the short-term I think we have got a little more pain to go and my bottomline point is watch volatility, watch dollar-yen, watch commodity prices.
If commodity prices begin to come off, then we move into a situation where the market is telling us that this is not about financial leverage any more. It is also going towards growth. And as I think the other guest was saying, Q4 is expecting a US recession, we are not as bearish as that. But we have been watching commodity markets quite closely.
If the US genuinely does go into a recession, then we are not going to go back into this market. I don't believe in the theory that emerging markets can decouple from a US recession. From a US slowdown, yes; but from a complete collapse in US growth, absolutely not.
There is a lot of debate about whether the US is going to land softly or it is going to land hard. I think the key question is not the landing. It is the take-off. What is going to happen to US growth in 2008 and 2009?
I think we are going to see sub-par growth. If we see sub-par growth, emerging markets will hang in there, I think we will be okay. But if we see much lower growth than that, if we see a recession in the US extending for a quarter or two or longer than that, then emerging market assets will also come into strain. So, these are very interesting times. I think we will have to be very nimble with our portfolios at this point and we will have to watch a few indicators very closely - commodity prices, dollar-yen, retail money flow from Japan and also the real money flow into emerging markets.
Q: What is your sense? How much money needs to go out of the system and can the system be crunched some more you think?
Aloke Nandi: The main problem that I find a bit difficult is let's look at two things. One is fundamentals, we have been talking of the Indian fundamental story. Well, that story has not really changed much. So, as far as that is concerned, that is not really going to impact the stock market.
What is more important is, what kind of FII flows will come back once we stabilise. First looking at the way we can go down, I think we can go down another 2000 points easily from here.
There are already hints of problem in the commercial paper market. About 7-8 days back we very discreetly saw an announcement by SABIC, a Saudi Arabian oil major, which quietly announced that is no longer entering the bond market for its recent acquisition, it was entering into a bank loan. So, the problem is going to spread, it is going to take time. If the FII money goes out and it will go out slowly, then the recovery from that will not be very strong. Every rally that we have after that, will see a big amount of selling going into it. So, we might go down maybe 1000-2000 points. There is no total breakdown of the economy anywhere as such. But what has been happening is the greed that we saw in the last 7-8 months, when everybody were out-leveraging themselves to get money into the stock market, that is going to stop, and that is going to hurt a lot of people.
Source MoneyControl
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