The big fundamental question for every investor remains that in a world where liquidity will slowly wane-off, how will emerging markets do as an asset class, says Udayan Mukherjee.
There are hopes of seeing an improvement for our market and the global markets today, especially after yesterday’s dull and disappointing session, says CNBC-TV18's Managing Director, Udayan Mukherjee.
The US market closed up yesterday and today Asia is quiet but positive. But it is a fact that US is improving with every passing week but we don't seem to be doing well.
According to him the only silver lining is that the markets this time have not reacted as violently to the US weekend data, like it had the last time, when there was an irruption of panic in global asset classes.
He thinks there is no reason for Nifty to go beyond 5900 because if one looks around things are not great, currency is not doing well, flows are not there and earnings too are not expected to be good. "The chances are that we probably grind and then eventually go below 5,750 as the results starts coming in which will probably disappoint," he adds.
Two weeks have passed since first panic hit the market with the news of QE withdrawal but markets have accepted the fact that come September-October-November maybe QE starts dripping and so this time the reaction has not been as violent, he adds.
However, the big fundamental question for every investor remains that in a world where liquidity will slowly wane-off, how will emerging markets do as an asset class, says Mukherjee.
Below is the verbatim transcript of his market commentary
On US and Emerging markets
The problem in the morning when one wakes up to good US markets is that one doesn’t know how to react -whether to feel good or bad because basically, one should feel bad that the US is doing so well. US is just taking it away in terms of market performance and that is the bad thing because the fountain of all money into global markets is the US. Every investor sitting in the US right now is wondering where he should put his money because his own market is doing so well; everything from stock market performance to economic data. So, whichever way you see it, the US is just tearing away and then why would they want to take extra risk and come into troubled nations like India and China where currency is at risk.
So, that is now showing up in the flows and that is why every morning when you see the US doing well, you know at the pit of your stomach that it is not good news for emerging markets. It is also a fact that US is improving with every passing week and we are not able to put our hand up and say we are also doing better.
However, the only silver lining is that the markets this time have not reacted as violently to the US weekend data, as they had the last time, when there was an irruption of panic in global asset classes. It is true that emerging markets took a bit of a hit yesterday, but two weeks have passed since the first panic hit the market on QE withdrawal and markets have accepted the fact that come September- October-November, QE may start dripping off and therefore this time the reaction has not been as violent.
However, I still think the big fundamental question that every investor is grappling with is that in a world where liquidity will slowly wane off and you are not going to have that kind of credit as we had earlier, how emerging markets will do as an asset class. Earlier, we have had a good run because of abundant credit in the world but as that starts to wind down, will EM still be a favoured asset class or have we left the best days of EM performance behind us at least for the foreseeable future.
All of us understand that this is not just an India problem; it is an EM currency problem. Although, it is true that India in last few days might have got whacked more than some of the other EM currencies. So how do you respond now?
This morning there are some tweaks happening on position limits etc, margin requirements. That is treating the symptom but that is not treating the disease. It might have a 50-60 paisa move in the rupee either side.
I am not blaming Securities and Exchange Board of India (SEBI), because it is doing the right thing in trying to take away some of the speculative pressure from the market. And that they would do as a regulator, but one cannot feed a cancer fever with paracetamol but that is exactly what we are trying to do repeatedly for the last few days - ask oil companies to source dollars from the Reserve Bank of India (RBI).
Is that the reason why the rupee is really falling? If that was the reason, a bunched up USD 3-4 billion then Hindustan Unilever would have sorted it but it did not. So,the problem is somewhere else.
The only silver lining to the rupee is that everybody is panic stricken right now so it won't help to have multiple meetings but I read in the press that they are talking about things like a dramatic rise in the price of diesel. If that happens then that is far more of a potent shot than doing margin requirement changes. They are talking about taking the import duty on gold significantly higher; that I think would be a significant step as well. Whether it works or not at least we have to try and attempt something which eats away at the core route of why the rupee is falling.
Therefore, in the next few days one would have to see the response. There are always crisis in financial markets. How government stand up and respond to them by doing the things that they should be doing and not walking down that path of small cosmetic band-aids which the government has been trying to do, I think the time for that is gone. To try and talk down the market which they have failed at, to try and use band-aids which is not working, now they have to attack the route of the problem.
The market is still hanging in that 5700-5900 kind of range So, the market can just drift in that range like we did last week with some volatility depending on global outcomes. I do not know whether it is a great time for traders because a lot of stocks are still getting quite badly whacked. Even yesterday, the oil stocks, the bank stocks came off and real estate did so poorly.
It is not a good environment for traders but one can trade the extremities of it and that professional traders will do but it is not a great environment for the market per se. If it holds out, it will hold out for technical reasons or lack of selling. I do not see why the market should go beyond 5,900. Short-term movements are impossible to predict so the markets can do something surprising but there is no reason for the Nifty to go beyond 5,900 right now. Look around the environment, things are not great, we are entering an earnings season which will be quite awful unless we have a miraculous surprise. The currency is doing what it is; flows are not there, so why would the Nifty move higher. Trading kind of a thrust can always happen but I think the chances are that we probably grind and then eventually go below 5,750 as the results starts coming in which will probably disappoint.
On FII flows
It is not so much whether foreign institutional investors (FIIs) are selling buckets but who is standing on the buying side - domestic institutional investors (DIIs) are not buying, local is out. FIIs on the margin are sellers, so who buys to take the market higher. At best you are seeing a bit of stock specific activity here or there but otherwise there is no energy or momentum or commitment in the market right now.
On the other hand, on the bond market steady outflow continued. In the last five weeks, it was USD 6.5 billion at the end of yesterday. That is not a small amount of money to absorb. If you add to that the couple of billion dollars, which have gone out in the equity market, then we are talking USD 8-8.5 billion in just a compressed five weeks period. USD 8-8.5 billion for a market or economy of India size should not worry us. It is just that there is nobody to absorb that USD 8-8.5 billion, which is why even when that happens, the rupee goes for a complete toss like we have seen.
That is the irony of the situation or the time that we live in, that we need to monitor every USD 1-2 billion of outflow per week in the bond market and if that happens, who is going to soak that up and therefore the rupee goes for a toss.
So far, we haven’t seen too much by way of equity outflows but if they start matching bond market outflows then we have had it. Therefore, we live with that fear everyday that global funds will probably start selling at some point even in the equity market like they are doing in the liquid bond market.
On global sentiment
That is the problem. Now the mood has turned. So as they say, success has hundred fathers, while failure is an orphan. Our performance of the last few weeks, last few months resembles more a failure, than a success. Our equity market, our currency market have started faltering. Our bond market is not doing well either as it was over the last one year. So, Indian assets or emerging market assets per se are looking quite awful. So the mood has turned.
When the going is good and momentum is positive then you will find money coming in from Japanese ETF, European ETF, American investors, everybody will flock in but when performance begins to turn then all these investors suddenly start to get disenchanted.
Therefore, the general mood on emerging markets right now is one of grave disenchantment and there is no hiding that fact at all. Because the general feeling that one gets from talking to so many of our experts is that – who wants emerging markets right now.