Lotus AMC sees prolonged bear mkt in India

Ajay Bagga, CEO, Lotus Asset Management, said investors should sit on the sidelines and wait this out. "I don't think this is going to be a short timewise correction. It is going to take time. It looks like it is not going to go away very soon. We could be in for a very long prolonged bear market. So, one should be conservative. It is better to be safe first."

Anil Manghnani of Modern Shares & Stock Brokers said the way some stocks are losing value is quite worrying and discomforting. "When we break the 50-week moving average, we inadvertently go and touch the 200-week average, which is right now at about 12,500. The general consensus seems to be 12,000 in the market. So, maybe at those levels, we will make that intermediate bottom for this year and then have a sharp sort of bear market rally of 3,000-4,000 points on the Sensex."

Excerpts from CNBC-TV18's exclusive interview with Ajay Bagga:

Q: The pain does not seem to be ending yet?

Bagga: Oil prices are determining global markets. Oil is up 110% and we are seeing a commodity induced inflation and a credit crunch defused deflation. These factors combined whipsaw the global markets and India is strongly impacted.

The dollar returns are even more pathetic, given the rupee depreciation. It is a combination of inflation and deflation by the credit crunch globally which is impacting our markets. Now, it is getting into quite dangerous territory. We could further see a very rapid erosion of values in this market.

Q: What is leading to the kind of precipitous falls that we are suddenly beginning to see? Is it retail panic in midcap stocks or is it a lot of those hedge fund redemptions selling at the end of the quarter, which is coming in? The stocks were falling about 7-8% or 10% even in the large cap universe.

Bagga: A lot of it could be the function of volumes that have been trending lower. Last week’s volumes were down by about 6%. So, we have seen very low volumes and very low participation rates. This has increased the impact cost in our markets. When the FII is looking at Asia, they are looking at a Vietnam, which is off by about 66%. They are looking at China, which is off by more than 50% and India. In dollar terms, if you add on today’s reduction as well in the indices, you are looking at a 42-44% correction in the broader indices and in the small cap you are looking at nearly 57-58% of its recent highs.

So, there is a risk of an Asian contagion that the foreign investors are seeing. There is a continuous outflow in the market with no measurable or no noteworthy inflows coming in from the domestic investors who are largely absent.

In January, we were seeing about Rs 16,000 crore of inflows. April, May and June, each have seen about Rs 1,000 crore of net inflows only in equity mutual funds. So, flows have dried down and now the next stage would be redemptions coming in as people start seeing that we have reached the April 2007 level. At about 12,000 on the Sensex, we will reach the October 2006 levels on the Index and that is when serious money starts getting lost and you could see redemption pressures increasing on the domestic markets.

Q: How do approach this kind of market? Would you say it is a good time to accumulate or is this one of those bear market kind of situations where it is prudent to preserve cash and not deploy too much into equities despite the falls that we have seen?

Bagga: I would go for the latter. Now is the time to really sit on the sidelines and wait this out. I don’t think this is going to be a short timewise correction. It is going to take time. It looks like it is not going to go away very soon.

Looking across global markets, we have enough historical precedents where one has seen multi-year corrections setting in. We have enjoyed four-years of a very good run. We could be in for a very long prolonged bear market. It would be best to be conservative and to be safe first. That is what we would really be advising customers.         

Q: Have you seen any capitulation already in the HNI, retail space, in direct stocks or in mutual funds or in PMS schemes? Are there any signs or do you think that leg down is still got to come?

Bagga: A lot of that has to come in yet. On the PMS side, structured notes led products are really selling or the capital guarantee kind of products that give you all your capital back in a guaranteed form. You normally have the dice loaded in favour of the issuer.

That is the kind of derivatives that these products are loaded on. But that’s what is really selling on the HNI and on the PMS side. There is no participation in mutual funds. It is more SIPs. We have about 30 lakh odd SIPs running in the markets which are providing Rs 1,000 crore of net inflows. Largely, the retail segment is absent. The one silver lining is that the leverage is down in this market.

So, people have not really been hurt as they had in January. The good thing is, if you add on six-month more of productivity into this economy, you are sitting on about Rs 4,00,000 crore of accumulated household savings, which have largely gone into very safe sectors. That, over a six-month or one year period could accumulate into a pretty decent amount and could have an impact on the markets. But not right now, the catalyst again would be global investors coming back.