Excerpts from CNBC-TV18’s exclusive interview with KR Bharat:
Q: Have we hit the worst? Can we slowly rebuild from here or is there much more of a rollercoaster that lies ahead?
A: Honestly, I wish I knew. This kind of the manic movement suggests that the worst is not over. Clearly, what happens in India is a function of what happens all over the globe. The easy way out is to say the worst is over and we have seen the bottom. But we need to be extremely wary. The recovery will be slow.
Volatility is now a part of our daily lives and it is going to continue to exist. There are lots of lessons to be learnt from what has happened over the last few days.
It is the lessons now that are more important than whether the bottom has been hit or more of that is to come. Volatility is in and it is time to learn lessons.
Q: What is your own gut feeling? Are we in for a bearish patch, for a few weeks or months? Do you think we may actually get back on track and go back to those highs, in a few weeks’ time?
A: I do not think so. I think its going to take much longer than a few weeks time. If the market recovers again, from Monday or Tuesday, it will probably lull all of us in a false sense of security.
What happens on one particular day should not allow us to cover our judgment. The bottom could well get tested again and if it holds again, I would say for certain that the worst is over.
If the market goes up a couple of thousand points next week, it does not mean that everything is hunky dory and we can go back to speculating.
There is going to be a lot of volatility ahead. The fundamentals are sound and slowly, in their own good time, we will head towards recovery and appreciation. 2008 is the year not of spectacular appreciation but more a year of consolidation.
Q: You have been a big midcap fan. What are your observations on how badly they got cut this week and where it leaves the whole space for the next few months?
A: There is going to be a lot of uncertainty after the kind of blood bath we have seen. If you compare prices of good midcaps to where they were a few years ago, they have outperformed pretty much everyone in their class.
But when such a carnage happens, people tend to shy away from midcaps on grounds of liquidity. So, it is going to be a difficult time for midcaps, for the next few months. But then these stocks tend to be far more driven by the fundamentals and the large caps. In the largecaps, one of the problems is that people are investing in stories.
In midcaps, people are focusing more on numbers, valuations and earnings. Therefore, for individual stocks, as people get to see how cheap they are trading, in an otherwise expensive market even now, investment buying will be happening over the next 2-3 months and then we should be okay again.
Q: Where do you stand on the interest rate expectation argument? Do you think it could be a potent bull trigger next week, both from the Fed and the Reserve Bank?
A: The issues in front of the Fed and Reserve Bank are completely different. When markets fell in the US and there was a huge selloff in India, everybody came on television and said that India is different, there is 8% growth going on and we don’t have the same problems as the US. So, why should the Indian market fall?
My response to that would be that it is absolutely correct and our monetary policy managed exceedingly well. So, why are we clambering for an interest rate cut? Our problems are different. If we don’t have the same growth problems as the US, then why should we follow what the Fed does, in terms of an interest rate cut.
The opposite argument is that with this huge cut in the US, interest rate differentials have widened to a level, where you will have a lot of undesirable money coming in to take advantage of that differential if we don’t cut rates. So, if we don’t cut rates, this undesirable money comes in and you will have to come up with a policy that will tempo the flow of this undesirable money and will also tempo the flow of desirable money. So, these are the two camps.
I believe that the monetary policy has not been the problem in this country, particularly for the last 3-4 years. A cut, if at all it comes, will probably be a token. I am not sure that is really what we need today. That is where I stand on the issue.
Q: What about the sectors that were extremely frothy, which a lot of commentators have spoken about like power, real estate, etc? Do you think the froth has been totally skimmed off after this recent fall or would you still be wary about those sectors?
A: To a large extent, the froth has been skimmed off. The worry is not that. The worry is will the froth come back and what shape would these markets take over the next 2-4 weeks. When I say that I am not talking about the level of the indices. I am talking about the kind of participation that we have seen in this market. Will it be similar, will there be a fundamental change in the way people in this country invest their money. That is what will decide whether the froth comes back or not. Until about 2-3 weeks ago, people were investing money in stocks because they were told to by their broker, otherwise their neighbour. They were borrowing money to invest in stocks that they knew nothing about. Until the way we invest our money in equity markets change, the froth will come back very quickly.
There is one more rider here. Everybody here, myself included, has a vested interest in interest rates coming down and in the markets going up, because we are all invested in these markets. I am invested in this market. I don’t want to see this market coming off. I did not like to see the fall that came this week, even though I have been shouting from the rooftops for the last 2-3 years that what is happening here in terms of the way we invest our money is not good and needs to change. Excessive speculation is not good particularly for the retail investor.
It is only when something like this happens that there is blood on the carpet and people withdraw to their shells. Lo and behold, two or three months later, the party is back on again. There is nothing wrong with having a party. It is what you do at a party which is the problem. If you are going to have a party, where everybody eats and drinks up to their limit, has a wonderful time and goes home, that is great. If you have a party where people are snorting coke and marijuana, then that is a big problem.
Sometimes our market seem to resemble that particular jumble where everybody seems to think that making money is the easiest thing in the world. All you have to do is buy a stock today and sell it tomorrow because everybody in the print and electronic media is talking about resistance and supports and buy here and sell tomorrow and you will make 10 bucks and so on. That is what needs to change and that is what will determine whether the froth comes back or not.
Q: What do you see in 2008 as leaders? Some people have been making the point that now those long five and six-year dream based investing will go out of the window for a while and people will focus on earnings. Therefore, some of the more staid sectors might come back into vogue? Do you see a possibility of that?
A: Yes, I do. For me dream investing is where I can see earnings growth over the next three to five years and not where I see something big happening five years from now. I discount today's NPV. There are plenty of stocks across sectors where you actually can see that happening. They may be old-fashioned sectors or they may not be depending on what you think are old fashioned or not. I think that will come back and people will focus on investing for the long-term, based on earnings that are as predictable as can be under the circumstances and not some magical event happening three or five years from now. I completely agree with you. I think that is entirely desirable.
KR Bharat
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