As the horrendous week that saw terrorists striking in the heart of downtown Mumbai draws to a close, the ripple effects would make their presence felt, no doubt.
Speaking on the aftermath of the Mumbai terror attacks, KR Bharat of Advent Advisors said the situation was quite bleak even before the attacks. “The complete impact of the attack will hit us in a few days. We see economic slowdown in India. So, there is an urgent need of reforms in the security and economic space.”
Ashok Wadhwa, Managing Director and CEO, Ambit Holdings Private, said events of the last two days were absolutely catastrophic. “The impact of such a serious attack cannot be marginal. I think the terror attacks are likely to hit sentiment immensely. The attacks are too serious to impact India's image as an investment destination.”
Anand Tandon, Director-Equities, Brics Securities, said he is not extremely bullish at the moment. “The attack has harmed the prospects of commerce and industry. However, equity markets are not likely to see any longer-term impact. But ramifications will be seen economically and geopolitically.”
Q: How do you see the road forward from here given what has happened this week and the impact as you see it?
Bharat: If we go back three days in time before these horrendous events unfolded in Mumbai, the situation was bleak enough then. Nobody was calling for any great level of economic recovery either in the Western World or indeed in India and conventional wisdom was that the markets would drift downwards. The recession in the Western world was there for at least a couple of years if not greater.
People were looking at interest rates coming off in India in order to get some growth momentum going, so things were looking bleak and then this event happened and now people are analyzing this even and what will the impact be. My answer is regardless of what kind of brave face we put on it, the reality is going to hit us maybe in two-three days time and what is in front of us is not a pretty picture.
On the economic front there is clearly a slowdown in India and on the geo-political front, if we ignore this and talk about the spirit of Mumbaikars and how things should come back to normal; I think we are doing ourselves and our country a great injustice. This is a time for a lot of debate and for a lot of reform not only in the economic space but also in the security and geo-political space.
So the situation is not looking good and I am not saying this is only because of the horrific incidence affected me because I know quite a few people who have not been able to make it which is why I am saying let's go back to three days ago, situation was bad enough then and I don’t see how its got better, its got infinitely worse.
Q: It appears that global markets are trying to put in some kind of a countertrend rally in place into the end of the year even the S&P (Standard & Poor’s) rallied almost 20% from its November lows. Do you think that will fructify a smart bear rally kind of a move or is that being too optimistic in your eyes?Bharat: I do not know there will be bear market rally as we go along but whether it will last ten days or twenty days I cannot tell. To me what seems to be obvious is the fact that there is a huge economic slowdown. I think the repercussions of what’s happened in the US are going to be felt not just in the US but in the rest of the developed world as well which will have impact in turn on emerging economies.
From anecdotal evidence, I speak to people in Singapore and in the US; the situation is not good at all. People don’t drive as much as they use to, people certainly don’t shop as much as they used to and banks are now under tremendous pressure to cut down on the size of their balance sheet and the entire Fed package – its not just an injection of liquidity into the system for people to do as they feel fit. It is the bailout package for banks to meet their immediate liabilities and the point is that while this will help the banks to meet immediate liabilities, the liabilities are becoming due in six-nine and twelve months going forward. I am not even talking beyond that – there is yet no provision made. So, banks will have no choice but to further contract the size of their balance sheets which means they will need to start withdrawing loans from the “good borrowers” as well which in turn means contraction of economy, recession etc as I do not need to say that far more competent people than I have outlined what’s going to happen from an economic perspective.
Therefore, in the light of that it is difficult to see why people would commit increasing amount of money assuming indeed that they have that liquidity to commit to equity markets. Having said that valuations will come to a stage where people will say, we cannot go any further than this. What I am trying to say is we have not come to that stage yet either in those markets or indeed in India on the back of liquidity by and large and if there are bear market rallies – great. But the overall trend to me is clear that this market will drift downwards over time and I am only hoping volatility is not as high as it seems to be because this is going to be prolonged and therefore the slower the pace of the fall the better for all of us. If it’s going to be extremely volatile then the pain is going to be much more than what people would like to bear.
Q: What’s your sense, unfortunate that the incidences of this week are? How do you access the limited economic and financial market impact of it going forward?Wadhwa: It’s a horrible time for everybody, it’s a horrible time for us in India, it’s a horrible time for those who are watching this event within India or outside India and for sure the impact of such catastrophic immense cannot be marginal. I think we were all already reeling from serious troubles emerging out of global events and then going themselves into local events and I think this come at absolutely the wrong time. I believe it will hurt the sentiment immensely, I believe it will seriously impact India’s image as a country where you really want to invest.
Just a day before yesterday I had a long discussion with the group of CIO (Chief Information Officer) who came to see me and I was telling them that it doesn’t matter if the FII (Foreign Institutional Investor) money is looking at moving out of India. In my few trips over the last few weeks, I have seen serious amount of large multinationals who have strategic intent of investing in India, looking at India very seriously and dare say that the events of last two days must shake them and must get them to start seriously thinking about whether India is worth looking at a long-term destination.
Q: How much of a slowdown are you expecting from the current level of GDP growth and your take is that the market has not entirely priced it in even with the crunching fall its had over the last couple of months?Bharat: I think so; I think the level of pessimism that you see in other emerging markets is not yet matched in India and China. I think these two markets the level of optimism is higher than that we see in other emerging markets. But is that because these two economies will do better or is that because we are still indulging in wishful thinking is a point for debate but the reality is when I speak to entrepreneurs, to promoters to find out exactly what is happening on the ground as it were, the feedback is that there is just no money coming forth from the banking system for example without mentioning names a company as of last year did a turnover of Rs 700 crore and is likely even in this difficult environment to do a turnover of Rs 1,100 crore for the last seven-months their application for increased working capital limits are still under process. So, how do you expect them to achieve a 40-50% growth if they are not getting support from the bank? It is not that they are not getting support from the bank because the bank doesn’t like them but the bank has its own compulsion.
We have to make serious efforts not just to push liquidity into the banking system but to get that liquidity out of banks and into corporate India which needs that liquidity to bring forth future growth. This is something that has been happening over the last three-four months and the fact that companies have been complaining increasingly getting support from the banking system. I am not talking about real estate companies; I am talking about companies that are in other sectors.
Therefore, I am actually much more sanguine than most about what kind of GDP growth rates we will get. We will still be better than most of the rest of the world. I don’t want to put a number to it but I would imagine this fiscal year the number maybe 6.5% but next year will be significantly lower, maybe 5% is what we can realistically expect but that is something that the market has pretty much factored in.
The issues going forward now are how we are going to reform our system financial, economic as well as geo-political that is what most people are going to wait and watch.
Q: What’s your sense of how things move from here even globally? Do you think the market can put in a bit of an effort after a dismal 2008 and try and move up a bit from here or do you think most markets will grind down and form newer lows? What’s your sense?Wadhwa: I personally believe that the FY08-09 from an India perspective in many ways the markets will have hopefully reached the bottom or the near-bottom of it. If the Indian economy has to grow at 7.25% this year and even if there is a slower growth next year certainly in the first half, I would argue that certainly on relative basis we would have performed better than most world economies and - how low can the market go below that?
So I am more optimistic than most people in terms of the recovery. I continue to believe that the rest of this fiscal year will be extremely slow year and will be pretty range bound on the lower side that we been witnessing the markets. But I am equally optimistic that come the New Year and certainly maybe in the second half of the New Year which in the second half of FY09-10 we should see a more positive movement in the market and therefore our belief is that those who are long-term investors should see serious value in the market either right now or soon and should continue providing support to the market at those levels.
Q: I want to ask you about one sector which is getting more and more punishment. There is no recovery inside; Unitech is a good case in point. The stock is down 50% in the series again. It’s down to Rs 20 now. Does the market sense any major bad news which is coming for some of these large companies?Bharat: What’s happening in this sector is pretty obvious. Everybody got carried away just like they did in the stock market and people started convincing themselves that prices in India whether they are stock prices or real estate prices could only go one way and you could virtually double your money every month. People had completely fooled themselves so valuations got way ahead of themselves.
Now it’s the reverse that’s happening; people are in such a state of panic; margin calls, people holding stock at ridiculously high prices and now when it’s too late perhaps people are saying, whatever I can get out, let me get out and get in whatever liquidity I can back into the system and today therefore for most companies prices are far below intrinsic worth of these companies. In some cases companies have as much cash as their market cap is. But that’s what sentiment is all about and the added problem as you very correctly pointed out is that to my mind certainly there will be a few defaults in the sector; you will have some companies going burst. We don’t know which they are; I don’t track that sector too closely and in any case I do not comment on individual companies so we don’t know and if people believe that even or two could go burst out of maybe a dozen or two dozen all two dozen of those companies tend to get punish because it’s a heard mentality. People say, lets just get the hell out of this sector and either keep money in our pocket and maybe put it in a defensive sector and that’s what you see happening.
When does it turn, if we go back to what Mr. Wadhwa was saying earlier – when is a good time to buy? I think the answer that most people have given whether it’s correct or not is irrelevant. If this is what the majority thinks, the answer is wait and watch and when we see concrete evidence of a turnaround globally or domestically then we will think of buying stocks and I can go long with that view and I am not as optimistic as a lot of people who recently be coming on your show.
I think in the five year bull market not one person ever called me and asked me – when do you think the market is going to turn? When should I sell? Whereas in the last nine months everyday I get five calls asking – when do you think its going to turn, when should we buy? I think we are not used particularly in the recent past as a nation to believe that if a bull market can last for five years a bear market will not necessarily will go away in one year’s time and that’s the way I look at it.
Q: A question on the sectors which got punished on Friday, hotels, aviation? Do you see this as an opportunity the knee jerk reaction to the panic attack or the terror attack or do you think these sectors needs to genuinely adjust downwards?Tandon: Obviously there was a huge knee jerk down which was justifiable because the traffic will slowdown. But this would be the time when many of the hotel companies will be trading below their intrinsic value of property by a significant margins and I do not think their earning part is going forever.
Aviation is a different story; I think the aviation has not made economic value and until and unless you see sustained falls in fuel prices as well as increased seat usage. I think that will be the sector which will always remain some optimal.
