Lehman Bros sees further damage in US fin sector

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Lehman Bros sees further damage in US fin sector

Paul Schulte, Chief Regional Equity Strategist of Lehman Brothers expects further damage in the US financial sector, he told CNBC-TV18. He thinks India may be impacted by global liquidity flows. He expects India, Malaysia, Philippines & Indonesia to retest previous highs. Outflows of $7 bn will come from global equity markets in Jan and Feb.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news United Phosphorous |

Paul Schulte , Chief Regional Equity Strategist of Lehman Brothers  expects further damage in the US financial sector. He thinks India may be impacted by global liquidity flows.

He believes India, Malaysia, Philippines and Indonesia will retest their previous highs. It is expected that outflows of USD 7 billion will come from global equity markets in January and February.

He likes United Phosphorus , Advanta , and the food and agricultural sectors.

Excerpts from CNBC-TV18's exclusive interview with Paul Schulte:

Q: What is your sense, is there another leg of a fall lurking somewhere to come and haunt us or you think the worst is in place for global emerging markets?

A: What I think is going on right now, is maybe manyfold. Nnumber one is that expectations have dropped dramatically all around the world and as expectations drop, equities will definitely drop as much as they have before. Number two, policy makers are acutely aware of the problem; we have seen astonishing rate cuts all over the world, we have seen some very large fiscal packages being released all over the world. There is an appreciation for the danger, I think the policy makers appreciation of danger is a very important element for equity markets which puts a floor on the equity markets for the short-term. So I think all that together gives us sort of a rally for a while. But I do not think by any means we are through the woods yet; there is enormous amount of damage up there in the banking system, there is more damage to come and so I think we will be a little bit naïve to say that worst is behind us.

Q: Do you expect the January lows to be retested then and what is your sense of when it might turn a little murky and volatile once again after this leg of the rally is done?

A: I think this leg probably is going to go on for a while. I think most of all because I just finished 23 cities tour around the world and met with hundreds of fund mangers and the level of bearishness is actually diabolical and so with this extreme bearishness that I encountered on three different continents - fund mangers are saying it is bad and when people keep saying that, markets tend to have this desire to rise - markets only ever bottomed when everybody has sold. That is the absurdity of markets in many ways and so I think we have tested the lows for a while and I think we are going to be seeing this having more legs than all of us think. But I do think that in the summer time, the one thing we are looking at is the bankruptcy rate in the US, it is probably going to be rising towards the so this summer could be some more treacherous waters.

Q: What is the best case scenario - you are working for the US economy - that has been the source of most of the disappointment, is it indeed heading into a recession or is it going to be as someone aptly call it a soggy economy for a while?

A: I think soggy is a good word. From how I see it, the fundamental problem is that the world has an acute capital shortage in the banking system and so what I like to call it-we have a severe liquidity recession. Liquidity has receded in very dramatic amount. I would give an example of how it is affecting India; global investment banks who are having problem take away the leverage and hedge funds. Hedge funds have to sell as leverage falls. Global private banks in Europe who are major providers of liquidity to private clients in India are taking away leverage - they are forced to sell. So this deleveraging is affecting virtually every part of the whole liquidity food chain and that is being caused by the write offs, which Lehman Brothers now has at USD 215 billion and counting, so far since July. So that would be somewhere more than 10% of the global banking systems capital has been written off and so those numbers are likely to peak soon and begin to come down but there has been a lot of damage done to the liquidity and the underlying economy, Lehman Brothers' views on that is that we are going to skirt a recession barely; but have quite low growth for the rest of the year.

Q: One argument being put forth for India as a market though is the fact that its going to remain in a zone because it's too expensive to attract new money and the other part being the fundamentals are too strong to see deep cut - do you go with that argument or do you think even India as a market could see lower levels?

A: That is good point and I think that is probably an accurate description of what's going on. I think we are seeing a retracement here. I think the action you have seen recently is part of an overall global equity rally. So India is still very much part of global liquidity system and so its going to be subject and in many ways held hostage although we don't like to hear that; it will be held hostage by global liquidity flows but I think it will be an absolute definite outperformer and people who could be long at long Indian equities and short some other thing to protect themselves from it - that maybe appropriate strategy for exactly the kind of scenario that you are describing.

Q: If people are bearish on the market and these markets are going to surprise on the way up, do you think any of these markets like China, Hong Kong, Singapore, India have a reasonable shot at getting back to their old highs or would that be overstretching the case?

A: I would say that the markets have had a very excellent shot at getting back to their old highs relative to other markets would be Malaysia, definitely India is one of those, Indonesia, the Philippines and I think China is going to have a hard time getting back to its old highs. We are not very concerned about China because China is making in 20-year history of outstanding economic performance and managements - the price controls in China present some very serious problems for the Chinese economy, especially in the food areas. So we are concerned that inflation could be far more problematic in China in six months time than just about anywhere else in that region and for that reason, we think the equity market is going to suffer.