Global mkts to soften; India to be hit more: Lotus AMC

Ajay Bagga, CEO Of Lotus Asset Management feels that there is a pullback happening which is justified given the kind of sharp drop that we saw in the markets. According to him, the longer-term issues still remain both global as well as domestic and that is what investors should focus on rather than looking at a day or two of markets like these.

He said, "A deflationary impact of all the credit issues and the inflationary impact of the commodities largely the oil and how will that impact the US economy in turn which will really determine the direction of the global economy." According to him, we are going to see a pretty soft equity market globally and the Indian market being a high beta market will get impacted even more.

Q: Do you think there is a possibility of a relief rally in the near-term?

A: Out of the last four working days we have seen the market bouncing back on three days. So, there is a pullback happening and that was justified given the kind of sharp drop that we did see in the markets. There is nothing very exciting and convincing about it. The longer-term issues still remain both global as well as domestic and that is what investors should focus on rather than looking at a day or two of markets like these.

Q: What is the key global issue the market will watch for? Is it crude or some other development?

A: Three major issues will be there with at least one of them very much dependent on the other two. One is the credit crisis; we are seeing a resurgent write off-season coming back. In the next 15-20 days, we will see results from major banks, major financial companies coming in. So, a deflationary impact of all the credit issues and the inflationary impact of the commodities largely the oil and how will that impact the US economy in turn which will really determine the direction of the global economy. Those are the three big issues we are not done with. Last week also we saw a lot of activity around fresh capital or a fire sell off assets by major financials being planned.

We are about USD 400 billion of write offs but a lot of houses are coming into foreclosure. Month after month it takes about six months from the first Equated Monthly Installment (EMI) to drop to house going into foreclosure and we are looking at a trillion dollar plus of write off. So we are not done here. It will go on for a long time, go into the automobile and the credit card side, bankruptcies are increasing in a scenario where unemployment is going up, it is steady at 5.5%. But employment numbers have been falling for some six months in a row in the US economy.

So, overall the macro is pretty scary and that will determine short-term oil price. We are quite convinced that apart from a geopolitical event like Iran getting bombed apart from that oil prices should cool off in the next few months as demand destruction comes in on the commodity side due to a slowing economy. So, that will play out. That will give some relief to oil importers like India but meantime there is no place to hide. We are going to see a pretty soft equity market globally and the Indian market being a high beta market will get impacted even more.