Teetering times for mkts this qtr: Experts

Q: What about interest rates, at the start of the year we were all hoping they will start coming down and now we don’t know how much they can go up, has it been a very deciding thing for the equity markets as well?

Jayakumar: The issue is that at one level as interest rates continue to climb and if there is even a remote confidence in the macros of the country, you will have money flows from overseas to start in a sense putting pressure on interest rates. But here the real issue seems to be that there is no other tool  by which the RBI has to actually choke the demand and what they are actually attempting to do is to go one step further which is be ahead of the curve. In fact if you notice, the average comment is where every CRR and repo hike is in a sense met with the markets now giving it a thumbs up in the matter of speaking; which is that they are ahead of the curve.

But the issue is that even they themselves have said that a lot of concerns around inflations stem from outside the country which the finance minister has said and which has been reiterated by the RBI governor. So I feel the things are outside our control then we really need to go back to the route of the problem which is that the amount of money that has gone into queers the pitch and the pricing of the commodities world wide and nobody for instance expected that a combination of India, China and some parts of the world will create this level of permanent ratcheting up of commodity prices and therein lies the rub and along with it comes the fact that you are pulling money out of the emerging markets and there is cash waiting. But that money or spare money being re-allocated and look at this thing - where every fund starts allocating the ex-percentage of commodities. This is the class which was almost not there a few weeks ago and you are going to talk about large scale destruction and you might say there is a bubble building up. But many of these commodities have actually moved to higher levels and generally has stabilized there. So I think it's an extreme thing and somewhere along the line the city prices don’t allow those prices to meet the demand except with a lagged effect.

So crude should, in my opinion, have moved in the USD 130  per barrel to USD 140 per barrel range and collapsed. But maybe it will collapse much later because if everyone is waiting for crude and other commodities to collapse, it's not happening. For example, Bao Steel re-negotiation with Rio Tinto with 90% higher prices on iron ore - these are scary kind of numbers. So interest rates, inflation and maybe we are in a period of substantially elevated and anxiety oriented levels of inflation and interest rates. That’s what one is getting the feeling and one would have liked to see otherwise because we have been in that era for about 3-4-5 years and to disconnect yourself and come out of that is an issue that a lot of people intellectually and emotionally are finding.

Q: What do you hear from the global investors that you speak to, there has been quite a bit of aversion on the markets like India, do you see that continuing, despite lower market levels and stock prices?

Holland: We did see a bit of the long only buying at the middle of the week and some investors are looking for those bargains but its going to be very select and I think we are not going to see the big inflows and unless you see that oil price come down, then all the concerns about inflation, growth and government policies will remain for India, so with that in mind the investors will just shy away and the great trade remains that keep long on Brazil and Russia and keep short of India and China, so that will reverse once the oil price comes down and I am afraid that in the short term I can't see that the foreign investors could be rushing back apart from very selectively into India. 

Q: You had a terrible quarter of market performance, do you fear that there could be more redemption from hedge funds and is that fraternity looking to take more money out of here?

Holland: We have seen a lot of selling in the past few months and that’s picked up and it’s hard to tell about redemptions because some and not all dedicated Indian funds as well, so it has been shifting around by the hedge funds already to take into account the fall in the markets, there could well be redemptions and its been difficult to state and we have been seeing some outflows and similar kind of long only funds in terms of mutual funds outside of India. But it's largely kind of small and isn’t that huge. So I still think that everyone believes in the India growth story. But we should remember that we are in a world where we have got three major shots in our hand and it's not just for India but it's globally.

Q: What do you do with the interest rate sensitives, banks have collapsed, real estate died, and infrastructure stocks have also collapsed quite a bit, do you buy value there or just stay away for the moment?

Jayakumar: I have been a great believer in the bottoms of stock picking and I still believe there is a lot of value in the markets. The issue now is not whether the value is unlocked or not, it's just that it may take much longer in this level of price destruction because what happens is a lot of the factors when they confluence together, in terms of soft interest rates, higher liquidity a lot of money on the sidelines and hedge funds wanted to come in and etc. That creates the demand, and today you are seeing a negative on each of these parameters and now perhaps, because one finds the pictures so bleak, the end is in sight. But I don’t know what it is or what set of circumstances make this actually come through. We keep referring to oil. But I think  it's more than just oil and I  think that the hard aspect of raising interest rates which actually should have come from the US, the US seems to be fighting shy because internally while inflation may be a contrary an issue, they are far more concerned about growth. The fact to the matter is as long as interest rates there remain soft, we are in a sense pampering the same problems that are created and the only way that you will actually have some of the commodity-related moves breaking down is just like when the Yen-carry trade was unwinding; it was unwinding the equity markets. Similarly the high interest rates will mean that the carrying cost of some of these are long with higher margining and higher requirements in some of these markets because many of these are OTC driven contracts in the commodity space. Higher margin requirements, higher regulatory influence and higher interest rates - even if in the US this started happening, you will probably find some of the commodity players pulling out because then it becomes more difficult to continue holding in an elevated environment.  

Q: If indeed we are in a bearish kind of market, do you think we will go back to those 10-12 kind of PE multiples where we typically have bottomed out in the past? is it conceivable?

Jayakumar: Something needs to happen to make money reflow into these markets. While we painted seriously gloomy picture right through is that if you go back to participatory note (P-Note) writers-the big bulge bracket firms -virtually everybody will tell you that almost every single holding in any of the stocks has been lent out to be shorted. So virtually there is no borrowing available for somebody to borrow and short in the Indian markets. From that perspective, today you can actually argue that there is no incentive for the short to cover.

Having said that, at some point in time since the gains are reasonably recent, the shorts will have to start covering. So one bout of short covering and I am not sure which broking house would actually put out the thing seeing that USD 7 billion of stock has been borrowed and shorted. As those numbers are right and long only funds also come in, the upward pressure on the short covering itself could actually sees reasonably large size rallies.

The other thing is that India has fallen significantly more than most markets. Now just to look at the Dow or the European markets fall, I think makes for no sense whatsoever. Today we have fallen 3 times of Dow; the Dow is probably down 11%-13%; for the year we are down 35%. In that environment therefore, we will find reasons to bottom out nothing else for short covering reasons. Secondly, interest rates keep going up; maybe there is a squeeze in the commodity markets and the unwinding thereof. If these things happen - of course what is keeping a lead in all this is just like momentum drove us on the way up, there is a reverse momentum in some of the funds etc especially the hedge funds which are facing not just redemptions but lot of performance problems and if those problems translate into a greater squeeze, I think you are going to have maybe the capitulation-selling which you are seeing is happening in a sense in the markets.

So I think a lot of this has been because of the capitulation - a lot of it may have already happened especially the size of the short covering, which I think can potentially happen whenever it does. I do not know if it goes to 10-12 multiples. I had a bottom that was much higher than where we are today. But given whatever, this 13,500-14,000 could actually hold despite all the negatives and maybe we break down from there and maybe it tests a little lower. But I suspect in those range, it is conceivable - when you overshoot, it would actually go down to 12,500-13,000. But I would be very surprised if we did.

Q: What is your sense? Do you think we are somewhere close to a panic capitulation bottom or not quite it could get much uglier than what it is today?

Holland: No, I think we are near the bottom globally. I am not so sure about increasing interest rates in the US though would do the trick. I think that economy is teetering in severe recession at the moment. I think the oil price will cause this demand destruction and therefore it will be just that companies will have to reduce what they produce and consumers will obviously continue to pull in their homes. So I expect that would happen over the next quarter anyway. If that leads to any kind of government intervention, that would help but in terms of where we are; we are just seeing more analyst downgrade coming in this next month. So I do see this is as a defining quarter in terms of where we are going and will get a lot of good indications of how severe the downturn is and I think once we see that, I expect it to be bad - that will start to see the oil price fall because you cannot really supply industries which themselves are seeing no demand. So I expect that to happen. So I am less worried about the US increasing interest rates because I do not think that would do the trick. If the oil price comes down which I am expecting this quarter, then we will start to see the liquidity start to come back to the emerging markets and particularly Asia which is-most Asian markets have taken a real beating because of higher inflation which is not just the oil prices but also the higher food prices. So I would expect to see money flowing back to emerging markets and in India thereafter but it is going to be another volatile quarter and it is going to start in July with the earnings results.