Are FIIs still bullish on India?

Singhai: In terms of asset prices, it is very difficult to put a number on when they were going up or when they are going out. So, this is a great time to go back and evaluate the fundamentals of companies. A lot of companies there have suffered from this erosion or the running away of liquidity. This is probably a great time for you to go and pick the companies that you like. You will never get to time the market right at the bottom, but it is a good time to start dipping your toes and buying things. There is nothing fundamentally wrong with the Indian economy. One will probably see a slowdown from exaggerated expectations of 9% to 7%, given that now France and lot other developed countries are going to get excited with 7% growth. I don’t think you can fall that 7% growth too much.

Prakash: One thing as Singhai and Arora have pointed out is no one is 100% sure on what exactly is going on. You are in a kind of uncharted territory. We have to understand that a lot of things are happening. The contagion is spreading or has spread a lot more than people expected. There is a lot of uncertainty in the market.

I think things have to settle down a bit. The clear objective is to cut risk. If you cut risk, the emerging markets are still perceived as being a higher-beta, higher-risk class. As soon as the things start settling down, which they will soon, you will start seeing money come back into India and emerging markets as a whole. But right now, if someone has seen an institution like Bear Sterns getting wiped out, then to go and pump money into India and China in an aggressive way at the same time is unusual to happen. It will come, but it will just take some time.

Arora: The taking out of Bear Sterns by JP Morgan is a good indicator of how the same assets when they reach JP Morgan’s balance sheet, its market cap went up to USD 12 billion yesterday and the stock went up 10%. So, that means it was more an issue of confidence and maybe deterioration of assets. JP Morgan took that risk on Saturday and added USD 12 billion to its market cap, so it is again the issue of everyday trade off. It cannot be that everybody will wait and then everybody will invest. It is a gradual thing and investors have to start coming in, as they feel comfortable.

Q: Some of these seem to be hurting Indian companies, we saw what happened to ICICI Bank. Can they be worst for Indian banks, how wary are you on Indian banks?

Arora: The big question is whether foreigners will came back or not. They have not really left India. Foreign investors have sold USD 3.5 billion of India stock. In the same period, i.e. two-and-a-half months, they bought above USD 2 billion of futures in India, which effectively exposed them to the same risk of stock prices. So, net selling by foreign investors in India year-to-date is less than USD 1.2 billion.

We don’t have to wait for them. They are not really selling. By not having a counter institutional framework in India where somebody has a separate view, horizon, and dynamics, all Indian institutional investors are waiting for foreign investors to take a view. They in turn are actually not taking a view themselves but are sort of hanging around and seeing this fall.

I always trust certain individual and certain banking institutions. For example, I will never question Axis Bank, HDFC Bank, and HDFC when they tell me that we have no exposure or that our exposure is limited. In the US, Bear Stearns has this problem. If somebody has a big track record of 13-14 years, I am not here to question them because someone somewhere made that mistake, so I stick with the banks that I own and I like them.

Q: But there could be some forex derivatives issues, which are really 7nobody's fault?

Arora: If my banks, the ones which I own, tell me that although some of our corporates have lost a little bit of money, they are not questioning me because they themselves are very large companies and for some very small companies collectively it is possible that they lose. So, the world is not going to sit here and wait because some fellow in India lost his networth which was Rs 50 crore.

Q: So, you don't see a NPA impact on India?

Arora: I don't think so there is an NPA impact. Even collectively, everybody is saying that the problem in India is less than USD 2 billion. Total corporate profits of India are USD 85 billion, so that's 2% of India's corporate profits, assuming that all of them are listed. All them are fighting, they have no other counter hedge that ever worked, only these hedges that blew up and nothing else. Collectively, India lost 2% and may be a less on futures but one cannot hit a stock down 50-80% because at the macro level somebody somewhere is losing 2%.

Q: Are we coupled or decoupled? Last year, we were up 70% while the US was up about 2%, so we are clearly decoupled. But this time the coupling thing seems to be very ugly, so are we coupled or decoupled or are these just two words, which mean less?

Singhai: Again it is a man’s take there. The capital markets the world over have shown a certain degree of correlation and one cannot run away from it. If you have the environment that allows for relatively free foreign inflows and outflows as far as portfolio investments are concerned, which India boosts off, then India would have an impact because a global investor makes portfolio decisions in context of his own portfolio. So, his Indian investments are in context of his investments in other asset classes, other markets across the world, so I think to that extent it is coupled.

India and a lot other emerging markets have come into their own over the last decade or so in developing a strong domestic consumption story, with greater retail participation of domestic savings in domestic capital markets. To that extent, this has happened in various countries. One can describe as decoupling because these investors have their own different horizons, and investment compulsions. Therefore, they will tend to take decisions that are different from a global investor making an allocation to India portfolios.

Q: Coupled or decoupled?

Prakash: Economically, it is decoupled. India will still grow at the worst case 7-7.5% this year. In an environment where the US is clearly negative growth, Europe one could argue is negative growth, Japan is negative growth and that’s a pretty good. Indian companies will have positive earnings growth this year, at least 10-15%, in an environment where corporate earnings are not growing anywhere else in most of countries of the world.

As Arora pointed out, what one is seeing right now in India is a confluence of just limited amount of selling from foreigners, nothing near as dramatic as people make it out to be. There were some over froth to a certain extent in the retail investor base. Too much leverage in the domestic Indian system in terms of too much F&O positions and stuff like that. We have seen a cleansing of that whole segment - domestic leverage, operators forward positions, and stuff like that.

What’s happened globally has got exaggerated. In India unfortunately, we don’t seem to have a very strong powerful counter cyclical institution, which can say look I am in India, I am running Indian assets, I have got 10-15 year money from Indian retail investors and I am taking a 10-15 year view on India.

Though investors may be there, they don’t seem to be very active right now. The last two-three days, the markets have fallen 5-5%. What actually is the volume of selling? It is actually not that much. 

Q: You could buy?

Prakash: We could buy. We are not big enough to move the market.

Q: No, you were saying earlier that you are trying to buy?

Prakash: It wasn’t a situation where I can go and put in 50 million bucks in one stock and I get everything I want. The stuff you want to buy was not that easy to buy. You buy little bit and it starts moving up again.

So, it is just a crisis of confidence. People have lost a lot of money, which is unfortunate. So, there is some slowdown fundamentally, but the fundamentals are nowhere near deteriorated as much the stock markets seem to indicate.

That’s technical factors, may be there was too much of froth last year, or may be there was too much overbought positions that’s corrected and cleansed out. So, economic decoupling is there, financial markets have less decoupling, but I don’t think this indicates that India has serious trouble and there is a lot of big issues.

Arora: One more thing, first of all decoupling or coupling depends on the horizon over which you say. Every morning we looked at all the cues. Even this year we look at the cues. How come US is down 12% or 15% and we are down 30%? So, we look at them on a day-to-day basis but over a slightly longer period they just go in their own directions.

So coupling or decoupling is a matter of horizon. In India, if somebody looks beyond a few weeks or few months there is much higher confidence that these decoupling will happen again at least in performance and that’s why I believe in decoupling.