Q: What’s your sense? Do you think regulatory intervention will solve this? Or do you think it is inevitable that there could be a global recession and those fundamentals will cap any serious upsides even if the panic subsides for the moment?

Prakash: Global recession is going to happen irrespective of when this thing gets over. That’s because the amount of panic and stress that has been created globally among companies, among consumers in terms of consumer confidence, corporate confidence, CEO confidence is significant. So a global recession is going to happen.

There is no alternative to government intervention. If you look at the numbers being thrown about — the International Monetary Fund (IMF) released a report two days ago saying that the western world financial system needs USD 675 billion of new capital to be recapitalised. There is nobody in the world who has USD 675 billion of capital available today and nobody is going to give that much money unless the government gets involved.

So any solution to this endgame involves the government in my opinion. Firstly because of the quantum of money involved and second, the problem of recapitalisation is: you only make money of recapitalisation if you come in during the last final recapitalisation. So the only way someone will commit new capital will be in association with the government. Nobody wants a situation where they put in money into X, Y, Z bank and the bank has a further problem and the government has to come in. Then the effect shareholder’s value goes to zero, which we have seen in an n number of US institutions.

So the government has to get involved because of both of the scale of problem and because whatever recapitalisation happens now has to be the final recapitalisation. It could be a joint initiative between the government and the private sector but it can’t be a situation where I put in capital in X, Y, Z bank and the bank has a problem two months later — the government comes in later and I have taken out at zero value.

So the global recession is going to happen because we are far down that way already and there is no alternative to government intervention because the scale magnitude of the problem is too severe and it’s too widespread.

Q: How do you sum up the technical position in the market in terms of demand and supply for stock? Where would any kind of buying emerge from at this point given the current confidence levels? On the sell side, is this FII (foreign institutional investors) selling or is this huge margin call pressure that is leading to the kind of damage that we have seen in individual stocks?

Kela: When there is a crisis of confidence, the seller wants to sell at any price and the buyer becomes choosy. So though you have seen the domestic institutions chip in and buy the whole of last week, when the sentiment is down it does not reflect in the stock prices immediately. Till the time you see the sentiment bottom out and even if things stabilise for any meaningful upside to come in the market, it will take time.

Once the sentiment stabilises gradually and you give some time to this market, only then will people who are sitting with cash start to selectively buy.

Q: Is it just a global technical problem or do you think there is some fundamental merit to the kind of damage we saw? The speed of the fall may be because of sentiment and technical issues but we saw some bad Index of Industrial Production (IIP) numbers this week. Do you think Indian macros and Indian earnings profiles are also going to worsen, something which has been priced albeit at a fast pace by the market?

Prakash: Yes, there is a general feeling that India is slowing quite significantly now. The IIP numbers are all over the place — though I am not sure of the 1% number — but it is undoubted that India is slowing dramatically and the gross domestic product (GDP) will probably go at around 7% or sub 7% this year and next year. There is a significant risk to corporate earnings. So the market was going to come down but the pace of the decline — like Madhu Kela pointed out that individual stocks are being sold at irrespective of the price — is because what you are seeing is force selling. People don’t sell stocks when they are down 20% in a day but they are doing it. The only way that type of selling makes any sense is when someone has no choice but to sell. So what you are seeing is forced redemptions on funds or investors pulling their money out just in a desire to be in cash.

If you go back two or three months, there were enough people who said that this would not be a global recession, that the US problem would largely remain a US problem. Now there is a general recognition that this is a global recession that is going to go on for at least 12-18 months. Therefore emerging markets that are effectively moving back to being considered as a play on global growth are getting hammered.

The distressing thing is the pace and the ferocity of the decline and the fact that it’s being indiscriminate — everything is being sold irrespective of the fundamentals. That’s the disconcerting part but it makes sense that the markets globally should correct and come off given the type of crisis you have. Some market decline was to be expected but obviously not of this magnitude or pace.

Q: You talk to a lot of the hedge-fund fraternity. Do you expect more accidents to happen there and that the continuous exodus of capital is to continue over the next few months because that’s been a big technical overhang on our market?

Kela: Even if there are not too many casualties, people will continue to prepare for them. So no one will be waiting till the last moment to hope that things are going to settle down. What I see among hedge funds is that they are right now net long anywhere between 5% or 25%, which used to be the number anywhere between 40-60%. Most of these hedge funds would be sitting on 20-30% cash thinking that if the redemptions were to come, they will be able to meet the first round. 

I was talking to one international investor and he mentioned that 70 hedge funds in Asia closed down last month. The capital available to this category of investor will not be as liberal as it has been in last five years.

Q: What’s the domestic situation in terms of liquidity? There has not been huge redemptions on mutual funds but are you seeing the first trickle of that or do you see the same issue of mutual funds sitting on cash and not deploying it because of redemption fears?

Kela: To be fair to the domestic investor, you will have to take that word ‘huge’ out. As a matter of fact, we are the largest asset management company in India and we are virtually seeing no redemption. Redemptions of Rs 10 or 20 crore are a normal process so I don’t think the domestic investor has given in that sense.

However, it is definitely working in the minds of mutual fund managers that given this state of the market, there could be 5-10% redemption and everyone is prepared for that.

Q: The other highlight of this week was the way ICICI Bank collapsed in the stock market. Is it conceivable that something is wrong because there have been repeated assertions from the management that nothing could be wrong. Do you think there could be any accidents in the Indian financial system, something which seems to be bothering investors?

Prakash: No. I would be very surprised if there are problems in the Indian financial system because the Reserve Bank of India (RBI) has been quite tight on regulations and ICICI Bank has made repeated assertions that they have no liquidity issues, both domestically and internationally. Even if you assume that if ICICI Bank were to have some type of liquidity issue in the UK or the subsidy, which is what people have been talking about the rumours — which I doubt is true — even then, there is more than enough liquidity within India which they can tap into and bridge that gap, if there was one, in the UK. They raised USD 5 billion six months ago at Rs 1,000 or 1,100 so they have liquidity in capital available. They have made a number of statements saying that they don’t have liquidity pressures, so have the RBI and the Indian Finance Minister.

So I would be very surprised if there is any risk to ICICI Bank and the Indian Government is behind ICICI — it’s the second-largest financial institution in India.

Q: The earning season also flagged off this week with Infosys not getting a great reception from the market. Looking at the IIP numbers and the kind of environment that we are operating in, have you as a fund manager begun to lower your earnings estimates in India as significantly?

Kela: Yes, we have lowered it in our mind and the market has more than discounted that at least in the short term. You may not see that in the index but if you go through the midcap companies and if you go through the top-100 lists, companies had reacted 30 to 50% in the last 10 to 20 days. So it is even discounted by the market to some extent. However, can it get worse? That possibility exists and we continue to monitor the situation.

On this IIP number, I want to say that we can’t extrapolate this one-month performance. Capital goods grew by 23% last month and this month there is a growth of 1%. I don’t think, between last month and this month, there has been such a slowdown to warrant this kind of a dismal growth. So one month is a too short a period to extrapolate this and form opinions and judgments on IIP numbers.

However, if this trend continues for the next two-three months then we will have to reconcile that things have slowed down much more than what we thought.

Q: As a fund manager, you have to bullish at most times because that’s your job but is it looking like a protracted bear market to you what it did not appear in the first nine months of the year?

Kela: You put it rightly because we are given to manage equity money on people’s behalf but trust me there is no emotion that I attach to the market. The very fact that we have been sitting on a substantial amount of cash signifies that we have not been very comfortable. There is no doubt that things have stretched beyond our own imagination.

But at the same time, I don’t want to panic and I don’t want our investors to panic and extrapolate the five days’ events and say that everything has come to a standstill — let me take money away. We saw many instances during the bull market between 2001 and 2005 when markets fell 20-30% and recovered back. The people who took note of those instances and got out, they would have lost money. This time the fall has been much bigger, but for people to extrapolate the five days and take decisions, I don’t think it will work in the long term.

Q: What does it look like though in the near-term? Do you think we are close to a bottom out here or does it look like we could see 8,500-9,000 levels on the Sensex?

Prakash: Talking about specific levels or price points is difficult because nobody knows it but I have never seen this type of extreme panic in markets globally or in India for such an extended period of time without a significant pullback rally of some type. So I think we are due for a rally because the panic levels are incredibly high and have been high for quite sometime.

The question of when and where we stabilise will be determined to a large extent by what happens in the US and Europe because the selling seems to be coming largely from foreign investors today. To a large extent, the selling has been forced upon them because of international conditions.

The issue among investors is simply that everyone recognises that this crisis will come to an end and it may take six-nine months but who knows it is coming to an end already. The process of putting it to an end has begun with what the Fed and Treasury are doing in the US, what the UK government has done by nationalising its banking system, what’s happened in Europe. So all these steps are slowly and surely being taken and these will eventually stabilise markets. As I said before, the alternative of the world just shutting shop and coming to an end is not a viable one and it’s not going to happen. So we will get out of this crisis, the steps being taken will eventually have an impact.

The concern people have is how much time from here and much lower the market can go. My sense is you have got a window of the next three-to-four months during which time the markets would be choppy and you will slowly get stability and you will form a base. To get a sense of when markets will stabilise you need to have a look at the credit markets in the US and Europe. When do London Interbank Offered Rate (LIBOR) rates normalise, when does the TED (Treasury and EuroDollar) spread normalise, when do corporate spreads normalise? There already are some signs of all these things getting slightly better.

Q: Do you think the 8,500-9,000 levels are likely on the Sensex?