Fin crisis round 2 may not wreck mkts: Experts

Till Thursday it looked like the markets were going to end the November series at a new intermediate high. "We had put on about 7.5% and then the market sold off on Thursday. We ended Friday with a dismal note because the world sold off on fears that the Dubai debt crisis might rattle financial sentiment once again," Udayan Mukherjee, Managing Editor, CNBC-TV18 said.

But the big question now is whether this crisis is overblown or can it be the trigger for a bigger global correction as we head into December? Nilesh Shah, MD and CEO, Envision Capital, says the development seems like an important trigger. "We may see round two of the financial crisis, but we don't expect it to be significant. We may however see pockets of concerns in the next few quarters."

Dhiraj Agarwal, Director-Institutional Equities, AnandRathi, says markets were anyway due for correction and the Dubai incident just acted as a trigger. "Market valuations were anyways looking stretched. We don't expect the Dubai scare to impact liquidity."

Road ahead for markets:
Shah sees markets in a consolidation phase. "The key level on the Nifty is 4,500. The market is likely to trade in the 4,500-5,200 range for the next few months.  We see strong headwinds above 5,000-5,200, valuations also appear challenging." According to him, the Nifty may touch 4,000 levels in the middle of 2010.

However, Agarwal says the Nifty could slip below 4,500. "We may see a 15-18% downside.  About 4,000 levels on the Nifty is a possibility." He sees an intermediate top for the market at 5,200.

Here is a verbatim transcript of the exclusive interview with Nilesh Shah & Dhiraj Agarwal on CNBC-TV18. Also watch the accompanying video.

Q: What do you think is this going to be an excuse or a trigger for a bigger global equity correction or do you think these fears stemming from Dubai are overstated?

Shah: It looks like it is surely going to be an important trigger because the reality is that the numbers are relatively large. These are not small numbers that we are talking of. We have to keep in mind that whenever any kind of a crisis begins to unfold, it starts off on a very modest note and it doesn’t look very damaging to begin with.

But what we find is that by the time we are through with the middle of the crisis or towards the end of the crisis, a lot more other issues and triggers kind of crop up during the journey of the crisis. I think that is going to be very critical that – is this going to just start off with Dubai and end there, or is this kind of going to spread itself and reach other pockets of the globe?

Also we have to keep in mind that the last time the crisis unfolded in 2008, it also kind of ended off in a pretty good manner and outside the US, except for something like Iceland or something like that which went under, we didn’t see the collateral damage extending to other pockets of the globe though despite the fact that at that point of time geographies like Middle East and Eastern Europe were talked about but nothing came out in the end.

What we are probably beginning to see now is that some of those other areas are now beginning to crop up and I think Dubai is one example of that. It’s quite possible that over the next few months or few quarters you would actually see some of the other pockets also emerge. That can basically you could say, be the round two of the crisis. Whether that round two is going to be as big and as devastating as round one? I do not think so and that is something which we need to look at.

Q: What’s your assessment because we've sort of steered clear of these accidents for the most part of this year? Do you think it could unveil the next leg of any kind of crisis? What’s starting off with Dubai or do you think it will get arrested at a controllable damage level?

Agarwal: I think that’s a tricky call at this point of time because whether Dubai will blow-up into crisis which is much larger or not is very tough to say. I think the markets were anyway looking slightly stretched both in valuations as well as funds flow in the last few weeks into this rally, and a sort of softening was overdue. Dubai is just a trigger in my opinion and not the real cause.

Q: Having looked at how institutions operate, do you expect any kind of institutional selling because of nervousness on European banks etc over the next few days and weeks or do you think there will not be such a big knee jerk reaction just on the liquidity front?

Agarwal: I do not think there will be a knee jerk reaction. I think the general feedback or what we are hearing from funds even today is this is not something to react to in India. There could be Indian specific factors going forward, which might affect the markets. But if you are asking a specific question whether funds will come in and sell because of what’s happening in Dubai, the answer is no.

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