Uncertainty shrouds sub prime situation: Blackstone

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Aug 15, a day of reckoning for EMs too 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?

Blackstone Group Senior MD Punita Kumar Sinha has a divergent view on sub prime. She said that uncertainty still prevails over how bad the sub prime situation is. She expects the volatility to stay till there is more clarity.

According to Sinha, all emerging markets, EMs, could see more profit booking. Though, she believes India might remain insulated.

She expects strong fundamentals might lead to people invest more in EMs, particularly India.Current concerns may be more protracted than May 2006.

She sees the rupee appeciating more and thinks the measures announced are reasonable. Sinha added that more redemptions in global funds would not come as a surprise.

Excerpts of CNBC-TV18's exclusive interview with Punita Kumar Sinha:

 

Q: How is the global situation looking to you now? We've been hearing a lot of bad news for the last 2 or 3 days, what's the general feeling you get?

 

A: It's still a little bit uncertain - the impact of this subprime on the whole economy. There have been a lot of conference calls by economists, and there are very divergent views as to how significant this might be. Some people come up with fairly low numbers and some people come up with fairly high numbers which is why one day you see the market go up, and other day you see it go down.

 

So the volatility will remain until there is more clarity. Right now it's any one's guess as to how bad this situation might actually become.

 

Q: What's you sense of how it will scar emerging markets because there have been lot of talks about now taking risk off the table, maybe some funds withdrawing from emerging markets? What's your sense of how this will pan out for the emerging market universe as such?  

 

A: It could pan out in two different ways. One is obviously that people want to reduce risk and they sell where they've made profits. Almost every fund has made profits in emerging markets and every firm has made profits there. So, in that context, all emerging markets could see more heavy profit taking coming in the future as well.

 

That's one view, but the second view is that on the fundamentals, emerging markets, particularly Asia and India in particular, is rather insulated from the problems that we've seen in this crisis. It's largely restricted to what we've seen in the US and now may be something in Europe. But the fundamentals in Asia are still strong and therefore, people might actually invest more in Asia. So I think we are going to see a little bit of both.

 

Q: Where do you stand on both sides of that argument, because the concerns seems to be that, flight to safety essentially means an exit out of the emerging markets like India?

 

A: I invest primarily in Asia, so I'm always biased that I have a long-term and a positive view on Asia. In the short term, there could be volatility and at the moment, the sentiment could be negative and there could be some profit taking and taking the risk off the table. But I think that the growth in Asia, and particularly India, remains strong. At some point it will stabilize and it could be a buying opportunity.

 

Q: What's your sense of how long it will take to finally resolve what's happening right now, because the past 10 days have been extremely intense and volatile. Now comparisons are being drawn with what happened in summer last year?

 

A: I think this could take a bit longer; my only concern is that almost a decade ago, when the Asian crisis started, it started with very little kind of risk potential and then risk just kept getting larger. It might be something similar right now where this could get larger before it gets better.        

 

Q: At what point do you think the fundamental decoupling that you are suggesting will kick in because as you are saying, emerging market fundamentals appear much better than the US? At some point, fundamentally there should be a decoupling then. But at what point, will that kick in because right now, we are all moving insync with the bad news from the US?

 

A: I did this analysis about valuation of Asia ex-Japan universe versus the global averages about a year ago, and Asia ex-Japan was trading at a 40% discount. Just about few weeks ago, I did the same analysis, and Asia ex-Japan is now trading on par with the valuations of global averages. So clearly, Asia isn't cheap.

 

So part of the correction is because valuations were high, the growth was strong, but valuations were high. One can argue that Asia should trade now at a premium to global world averages, but in the past it's never traded at a premium. So right now, the correction is because the valuations needed to come down a bit lower. When valuations come down to more reasonable levels, I think that's went the decoupling will really start because then people will start focusing back on growth.

 

Again, I'm not saying all emerging markets are going to be insulated, I think an export oriented economy will get impacted if this crisis does slow down the US economy. So in certain sectors in China, Korea we would see more impact. I think India, because it's not such a large export oriented economy, it maybe sheltered more just like it was at the time of the Asian crisis.                 

 

Q: What's your view on India specifically. Did you also believe that valuations had run ahead of fundamentals here, and what kind of valuations would seem fair for India now that we have started a process of correction?

 

A: Valuations always have to be linked to growth and the results were still coming out; so the growth numbers were okay, some where disappointing and some were fine. India look like at the time it was a fair value compared to what kind of growth was in the expectation. But if the market corrects, then it could look reasonable again.

 

However one has to keep in mind that India has underperformed other Asian markets this year. If one looks at China and Korea, some of those markets have done a lot better than India. A large part of the gains for global investors in India were coming from the rupee appreciating, rather than just a stock market rallying as sharply.

 

Q: Some of the analysts have made the point that there are 5-10% cut in a market like India is on par for the course. At that point, does this market represent value to you if you want to increase your allocation to it across Asia?

 

A: It's always a moving kind of target and in a sense, a 5-10% correction is good. But at that point, one has to reassess what's happening in the global scenario, and what are the risks that might have emerged. So it's never a hard and fast rule that one can stick to.

 

Q: How are you approaching the India currency right now in the light of some of the ECB restrictions which kicked in a couple of days back. And what's your overall view on the Indian technology sector?

 

A: It's hard to predict what the rupee is going to do. But if one looks at longer-term forecast from economists, all Asian currencies need to appreciate. In that context, it's fair for the rupee to appreciate as well. I think some of the measures that were announced in the last two days seem reasonable to me.

 

I cannot predict what the rupee is going to do, and if the rupee appreciates, then some of the competitive advantage of the export oriented sectors of India and IT services, will get eroded. They will have to work on improving their business models little bit cutting costs or whatever.

 

Q: What's your own feeling from what all you can see at this point in time. Would you be surprised if there is a 10% fall even hereon after the correction that we have had in most of the Asian markets that you invest in, or would you call that along expected lines for you?

 

A: I do not make forward looking statements, but I think the correction right now is partly driven by valuations hiving gone a little bit out of whack with the global valuations. Of course, the correction is also largely sentiment driven.

 

There could be further redemptions coming in global funds that are invested in emerging markets - so it's hard to say. I would not be surprised either way.            

 

Q: You did say however that it was just an okay sort of performance by way of growth. Anything in specific that's disappointed you about what you've seen in India this time around?

 

A: I think the auto sector continues to get impacted. It wasn't surprising, but perhaps it's a little bit longer than what we thought. And then it's very stock-specific, frankly.