Alok Sama, President and Founder, Baer Capital Partners said India’s GDP growth level is seen down to 5-6% levels, with downside risk, while the Indian banking system and corporates are in good shape.

Sama said drying up of portfolio flows to India will continue to be a big drag. But 2010 will see some sense of stability; however, no V-shaped recovery is expected until then.

Deleveraging process is unfolding at all levels across the world and the degree of leverage is main concern world over, Sama said, adding that pain in emerging economies will take many years to lessen.

Here is a verbatim transcript of Alok Sama aired on CNBC TV18. Also see the accompanying video.sen

Q: Have things worsen globally since we spoke in your eyes?

A: I was last here in mid-September and as you know last few times I have been on this programme, I have probably been a picture of gloom and doom but I must say at a deeply personal level I was shocked by the way the events unfolded through the month of October. The fact that we came this close to financial Armageddon; the fact that we had institutions to calibre of Morgan Stanley even Goldman Sachs have been on the brink, large scale nationalisations in the Western world and the US and UK Quasi -nationalisation anywhere, I didn’t see things getting that ugly.

And then what I must say was taken a back by is the ferocity with which the financial turmoil impacted the emerging markets. There is a great line that Warren Buffet uses which goes as follows, “You don't know who's swimming naked until the tide goes out” and that’s been so true. I could barely tell you where Iceland was on the map of the world but you have got an economy where the financial system, the banking system ran itself like a giant levered hedge fund. Russia which by all accounts given the accumulation of close to half a trillion dollars in reserves thanks mainly to commodity prices, to oil prices, with an economy like Hungary and it’s leverage at the household level, basically people had taken on foreign currency debt to buy homes, with Korea and its excessive reliance on short-term dollar debt in the banking system. So whatever you have seen any type of vulnerability people have been caught out I was really taken a back at the ferocity with which emerging markets across the board have been impacted.

I think things have gotten a lot worse, I think we have known for the while what the pressures on the world economy, on the financial system were in terms of the degree of leverage both at the consumer level particularly in the US and at the institutional level and I guess people including myself to a degree optimistic that the governments of the world might be able to engineer something that approached to soft landing but sadly we have got away from that.

I think you have now got a deleveraging process that is dramatic, that is fairly advanced at the financial institution level that is unfolding, at the hedge fund level and over the next few years we will unfold at the consumer level particularly in the US and that’s going to be very long and painful process. And at the economic level you have now got a base case scenario, we have got a prolonged deep recession, you probably looking at minimum of four quarters of negative growth. The GDP (Gross Domestic Product) statistics in the US for the last quarter is going to be quite ugly down 3.5-4%, as ugly as that. So I do think things have gotten a lot worse with respect to India from a systemic risk perspective India does look pretty good. Our banking system purely in a relative sense is in good shape; if you look at stats loans, deposit ratios India looks reasonably comfortable, look at corporate and personal balance sheet – no course for alarm there.

The big issue that India has had obviously is too much of the growth; the incremental growth over the last couple of years has been a function of foreign capital, particularly portfolio flows and that’s dried up completely and will continue to be a big drag on India over as much as next couple of years. So as a result India, again it is all relative - it’s going to be draged down to GDP growth level that’s certainly is in around 5% s with risk on the downside.   

                       
Q: What a lot of people are trying to gauge right now is what happens by the end of this year- do you think equity markets might be set up for a bit of a pullback rally, do you think we might go back to October lows or is it least probability that we might remain quite ranged?

A: Yes there is absolutely no clue and anyone who tells you otherwise, I just don’t know what you could base those types of assessments on. Just to give you some perspective on what is going on with flows; the theme is all about deleveraing and that is what is panning out in the global financial markets. And one could make up numbers over hedge funds for example, they are not regulated, there is lack of transparency in terms of the quantum or redemptions they have, the degree to which individual funds are levered, derivatives and likewise to a lesser extent perhaps with financial institutions. And one just doesn’t know what the pressures are to liquidate and likewise the pressure on redemptions how long it carries on etc. So there are lot of variables and as talented as some of the economists be who might appear on your this show are the reality is how do you take a month like October where basically the world stood still and you extrapolate that, how far do you extrapolate-that? - We are in no mans land, so honestly I have no idea.

I think the US markets you sort of retested last week the  lows you hit in October but we haven’t done that in India  - So could you go down and retest those lows?- I think it is probably  likely. Is there a possibility of a relief rally given how negative sentiment is, given how oversold markets are ?- Which is again likely but whether that happens next week, two weeks  or two months that is the bit that is impossible to predict.

So I would like to repeat my advice to anyone other than the die hard trader, these are volatile markets and not for the faint hearted.

Q: What is your sense of how much time we will have to grind through this mess, starting today and not from the beginning of the mess when it started in January, but from here on, will it take 1-2- 3years to fix, because that is what people are trying to game when this gets over?

A: Lets just step back and lets look at where it all began, what people were being extraordinarily concerned about over the last few years is the degree of leverage in the system particularly at the US consumer levels. To bring forth a couple of stats to give people some perspective on the problem; some of the estimates I have read in terms of destruction of wealth at the household level in the United States and I am picking on the US because the US because the US consumer has been the engine of growth in the global economies for the last few years but the quantum of wealth destruction at the consumer level in terms of what has happened with the housing sector and the stock markets now runs into trillions of dollars, it is somewhere between USD 3.5-4 billion dollars.

I have been used to dealing with pretty big numbers in my career globally in these markets but those are staggering numbers and if one looks at those types of stats; if you look at numbers there are estimate that suggests that as much as 3-4% of GDP growth between 2003-2008 was purely a function of mortgage equity withdrawals in the US, so in other words pure leverage and not just to buy new homes but people cashing in on equity in their adjusting homes, borrowing, levering up to spend on  cars, other durable goods etc. so there has been a lot of  excess and that is not something unfortunately that gets fixed in a hurry.

At the institutional level you had done a leverage, you had the Lehman’s, the Morgan Stanley’s of the world were highly geared, you had balance sheets that were geared 30-40 times; the ferocity with which they have delevered is in a sense impressive. I think the Morgan’s of the world are down to the low teens in terms of their degree of leverage, so that adjustment process is happening and we are fairly advanced into that but the adjustment at the consumer level, the pain in individual economies, emerging economies as they go through an adjustment process that will inevitably take many years to play out.

The good news if you want to look for silver lining is and if you want to draw parallels to the great depression which are inevitable going back to the late 1920s early 30s is that the degree of coordination between the economies of the world. Coordination in terms of fiscal stimuli, in terms of monetary policy coordination – that’s impressive and I think that at the end of the day gives the world economies a lifeline that at least has put off or dealt with the financial armageddon depression type scenario. So you have at least got a lifeline that if not a soft landing at least gets you into position where there is some type of smoothing of the delevering process and come 2010 you probably limping along towards some sense of stability.

I do not think you are going to see any type of ‘V’ shaped recovery as you might have in the past. I think the dot com meltdown was a good example where you have quite an incredible recovery after some unbelievable wealth destruction of a two year period so unfortunately I do not think there is any soft landing this time around, so you are in for a multiyear adjustment process.        

Disclosure:

It is safe to assume that my & I clients may have an investment interest in the stocks/sectors discussed.