Manish Chokhani of Enam Securities asks investors to stay focused on their company's profits because that's what matters in the long-run.
Meanwhile, Sandeep Bhatia of UBS feels that even now investors should use this opportunity to buy.
Excerpts from exclusive interview with Manish Chokhani and Sandeep Bhatia:
Q: What are your observations on this last six days of volatility? When do you see us coming out of it?
Chokhani: I will explain it the way I trying to do it my son, who is 13 years old. He said what's going on. I said think of it this way, we go for a holiday to Lonavala in the rainy season and there are two hotels called Dukes and Fariyas over there. To reach there, one needs to use the Bombay-Pune Expressway, on which some are offering fuels very cheap, and there is a alcohol shop on the side. What that has done is it has attracted a number of speed bikers who have come in and decided to rush up and down on the highway. Occasionally, they decide to spend their night at Fariyas and Dukes. This in turn pushes up room occupancy and prices over there.
Now, a couple of these guys had an accident. Therefore, everyone is very scared with what's going to happen to the prices in Dukes and Fariyas? Will the occupancy and rates go down? Should we, who want to go for the next weekend over there, go at all? In reality, when you look back two months from now, nothing would have changed. All that would have happened is that these speed demons would have fallen by the way side. Now, substitute the toll naka, which was collecting a lot of toll, in this case with brokers and news anchors. They would have something less to speak about and less excitement in life.
In reality, Fariyas and Dukes would do as well. People are going to come there irrespective of whether room rates or occupancies are going to change. What you will need to ultimately focus on is that this is a good holiday destination and only if that changes, will things really change. At least, he looks very comforted by that and that's how we all should be.
Q: Has it been quite a picnic for you and do you think the outcome will be the same or are you a bit more worried?
Bhatia: I am not worried. I think every market volatility is an opportunity to buy, that's what I had maintained when the markets was falling during the Budget period. We know where we are and even now it will be a fantastic opportunity to buy. I was in the UK and US in the last two weeks marketing and meeting senior portfolio managers who have been investing in India. The key outcome from all these meetings is that they will use every opportunity to buy, because the India growth story still remains fairly strong. Valuations have been demanding and this kind of a correction, which the market if it offers you, allows you to buy stocks cheaper.
I don't think anything changes and most of the money is just waiting to hop in at every fall. So, I would not think that India would have an extended problem.
Q: What's your sense that before it gets better, could it get worse, because we have had some disturbing noises and most market participants seem a bit worried because these corrections and volatility is coming after many months?
Chokhani: The question is who is a market participant. For an investor or company, it doesn't really matter because what will ultimately be the weight of profits will be the determinate value of that particular company. If you have derivatives in the market, then you have open interests in the market, which is more than what people can absorb and take delivery of. That's what leads to sharp spikes on the upside, which often crosses territories we hadn't imagined and on the downside as well. People who are been forced to liquidate do all kinds of funny things.
It's not that our positions here are very alarming. From whatever numbers I have seen last, we are above USD 20 billion on the futures market here, of which USD 10 billion was stock futures or slightly under. The rest was only on the index as well as in options, where the put/call ratios have really been favoring the put side rather than the call side. The market in that sense is balanced, it wasn't very euphoric to start with. I don't think there is that much alarm and it's been a bit over bloom in the Indian context for sure.
When all these things unwind, how badly they unwind or how well they take the market up on the positive side is something which no one can really hazard a guess to. I won't be a hero and try and put a number to that. Technicians come and say it will be 500 points lower or 800 points lower, it could equally be 800 points higher for all I know.
So, as an investor if you just stay focused on your company profits I think that's all that matters. If you get a price, which someone has to provide you because he just has to liquidate a position, I will be very happy to take that and that's really what we are telling all investors.
Q: In your trip did you get any sense of apprehension that there might be some risk aversion or liquidity withdrawal, which could be painful in the intermediate term?
Bhatia: Yes, definitely so. All the newspapers in the US last week were focused on what's happening there. I wouldn't be surprised if we have a couple of big scares coming through in the summer months. Historically, the summer months have always been very volatile. We saw that last year and we could see that again this year. The consensus is that the US growth is going to wind down through the rest of the year and we are going to see a slowdown in US growth and GDP.
We saw a very strong last second quarter in the US at 3.5% and we could probably see that slowing down to 1-1.5% by the end of the year.
As long as we continue to grow in the US, I think we will pass. If we see a recession next year in the US, then it does raise some questions about some sectors in India specially the IT sector, which could be impacted. Even if there were a big meltdown in the US, I would say that India would be one of the few markets in which the impact will be more short-term and confined only to some sectors.
The real story of India, which the international newspapers have still not picked up, is the big manufacturing story and the capex cycle. The country still seems to be the IT office and back office of the world, but that's the story of 1999-2005. From 2006 onwards, if you look at stocks that have performed they have all been domestic manufacturing stocks, and that is what will hold up this market in even the second half of 2007 and next year.
Q: What are your expectations about this wall of liquidity that we have seen particularly in July, do you see any temporary reversal at all possible?
Chokhani: Temporary reversals are possible. In a sense, this is almost like a mirror image of what happened in the 1990s, when the Asian countries went on complete spending binges and wrong financing and so on. We had a come up since 1998 after the Asian meltdown and then the Russian crisis. This eventually led to a complete mania in the telecommunications, media, and technology sector and the eventual bubble in the Nasdaq. We are seeing a complete mirror image of that happening right now, where this time, the shoe is on the other foot. It's the US which is going to come up in life, and it's the Asians who this time have provided the liquidity along with Opec and other oil producing countries.
That's really the source of liquidity and source from where the world is today as opposed to what the US used to be. I still believe that this is a long-term big bull market in commodities, emerging markets and India in particular. This will crest in a sort of mania at some point where people will realize this is the place to be rather than where they used to be.
Earnings have actually delivered magnificently in India and just to put in context we were an index of 3,000 four years ago. Next year, the index will earn an EPS of a thousand, so we are literally on a PE multiple of three. As long as India delivers earnings, which it seems is in a very good shape to do, there will not be a problem here. There is ample liquidity coming from this region, indeed from India itself, to provide legs to this market, to take it substantial higher in the years to come.
Q: Some investment banks have been saying that this for the moment has signaled the end of the global liquidity party. Do have any such apprehensions. Fundamentals we were discussing and they seem good. What about global technicals? Do you think there is any problem looming?
Bhatia: There could be bouts of risk aversion in the market. What's happening in the LBO market is that two big deals were in the process of getting finalised but there are no buyers of those bonds. We have seen risk aversion and clearly risky assets are not finding buyers. But would that mean there would be a liquidity crunch, I don't think so. As it has been pointed out, liquidity is coming from Asia and oil producing countries. We still continue to see surplus getting generated, I don't think we are going to see interest hikes in the US. I don't think in Europe you will see interest hikes. What will squeeze liquidity on a permanent basis? I don't see a big factor here. It's clearly going to be risk aversion and sudden classes of assets will suffer.
The real issue is whether that triggers a bigger meltdown in the US consumption cycle because that country is primarily propped up by the consumption engine. The only sector, which is healthy in the US, is the government, household, and corporate sector. In the US, it's only the corporate sector that is healthy and is still recording strong earnings growth. Some say the currency depreciation is helping the US record strong dollar earnings because the dollar is weaker. We have two sectors that are highly leveraged, which is the household and government sectors in the US.
If you compare that with India, the country's fundamentals are far better. We have an improving government balance sheet. The Indian consumer balance sheet has always been strong and the coproarte balance sheet is fantastic. So, what's the problem, A time will come when people will realize that the US has been running on steroids and once the steroids go away, you don't look as smart, fast, and strong. I hope the withdrawal steroids are not sudden because it can put all of us in a temporary spot of bother, but eventually this has happen. I just hope that is more phased rather than sudden.
Q: Do you think it is just a temporary scare then, which will blow over in a few weeks and we will get back to new highs?
Manish: I think so, because this is the US and they tend to dominate world price and world opinion, it has been overblown. In fact they have had even more serious crashes in the US for instance in early part of this decade and it didn't affect these guys because they don't know anything other than how to consume. And they will erode their capital, they will erode their borrowings and they will erode their neighbours and families but they will consume. So, I don't think that is going to disrupt the economy and they found this magic mantra of pumping more and more dollars into the system to keep the steroids going even longer. And until the world realises that the US dollar is fundamentally mis-priced and the rest of Asia price itself up, this party will continue.
And subprime is one end of the market and it is not mainstream part of the market. Even all the banks and all the names, which I have mentioned as having problems, realise this and have put them into really nice little buckets of funds of investors' money. It is not really the banks, which have taken the hit. And this is got spread around across the world so nicely and evenly packed into intelligent small pockets that someone somewhere will surely go bust when the whole crisis will completely unfolds. But I don't think it is that large that it is going to disrupt the whole global ecosystem of financial market. And certainly from an Asian and Indian context, it is again a buy-the-dips market, focus on what will happen next year. We are looking upward of Rs 1,000 EPS for the Index in FY09, you are at 15,000. If you disagregate even those earnings most of our largecaps - whether it is Reliance, ICICI, HDFC, State Bank, Telco - all now have sum of the parts imbeded in them. So, the earnings if any is higher, or you could conversely turn it around and say the PE multiple is even lower than what it seems on first sight. So I still remain extremely bullish about our markets.
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