Probability of mkt correction higher than upsurge: Experts

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It has been an interesting week for the market. There is almost an air of nervous expectation as we run towards September 18 for the US Fed meet. The markets have turned a bit volatile, but they have not given up much ground. Most markets are moving towards their old highs. The Sensex and Nifty have not covered too much ground.

It has been more of a week of consolidation, about 1% apiece, both the Sensex and the Nifty on the way up. But even so, a bit of a step forward towards that old high of around 4,650 for the Nifty. Some volatility, some edginess on whether the Fed will deliver the cut or not. So, global markets are interestingly poised and we are taking those cues as well.

Narayan Ramachandran of Morgan Stanley Investment Managers  said, markets were likely to be choppy over the next few months. He stated that credit market concerns were not over yet.

According to him, central banks were pausing in an up-cycle. He added that the US housing market issue had not been completely resolved.

KR Bharat , MD of Advent Advisors said, there was not much clarity on the extent of the problem in the credit markets. High crude prices, domestic political situation were some of the other issues that needed to be dealt with, he said.

According to him, the markets have become more volatile & unpredictable. He cautioned that one's approach should be prudent and watchful at this juncture.

Excerpts from CNBC-TV18's exclusive interview with Narayan Ramachandran and KR Bharat:

Q: How are you feeling about the whole global set up now, we have had a fall? We have had a V-shaped recovery, where do we go from here?

Narayan Ramachandran: We have been straight up and straight down and now straight up again. So, I think over the next couple of months we will get a very choppy market condition, primarily because a lot of things are still pointing in very different directions. For example, the credit markets have gone only from the ICU to what I would call the critical list, they have not yet made it into the 'I am fine' category just yet.

At the same time, central banks outside of the Fed are pausing in what would otherwise be an increasing rate cycle, for example at the ECB . The yen is well off its lows and it is now trading around the 115 zone. So, different indicators are trying to take stock of where they go from here. But the fundamental crisis, which was caused in the mortgage markets and the subprime markets in the US, and the economic area surrounding that, which is really the housing crisis, has not resolved itself completely. So, in my view, we are going to have choppy weather for the next couple of months.

Q: Is that what you are predicting as well or you see the markets stronger than that?

KR Bharat: No absolutely not. In fact, if anything, I would go one step further. I had alluded earlier to the fact that there could be a crisis in the credit market, and that that could have a global impact and indeed therefore an impact on India.

Going back to the analogy of ICU and critical state, the real problem there from my perspective is, that we have an information crunch, and while the patient maybe out of ICU, but still declared critical, I do not think there is too much of a prognosis on what exactly is wrong with the patient.

One hears all kinds of stories about banks having direct or indirect exposures through SPVs and so on. I do not think there is anybody who knows the extent of the problem, who knows how much is on balance sheet, how much is off balance sheet. Of the stuff that is on balance sheet how much has been marked down, how much has not been.

So, until we realize the extent or the dimension of the problem it is probably very difficult to say whether the problem is solved or not, and my fear is that we have not come anywhere near the end of this whole crisis.

Also, with crude prices where they are, will have its impact. Closer home, everyone has beaten this whole politics story to death. But there again the story has not ended and we do not know where we will go from there.

So, these are some of the short-term concerns. Once again, I hate to say this and sound like a broken record, the long-term story is absolutely intact and unchanged. But the short-term has become increasingly more volatile, more unpredictable, and therefore I would urge caution.

Q: Are you expecting another leg down then very soon?

KR Bharat: I would think so. Between the two options, the probability of a correction is far stronger than that of a huge upswing. If you ask me to list three things that could be hugely positive for markets both local and global, I find it difficult to do so. But if you ask me to list five-ten things that could go wrong, not too difficult at this stage.

Q: When you say volatile, do you mean that another correction is looming in the next couple of months of the nature that we saw in August?

Narayan Ramachandran: I would rephrase it as a retest. If you look back as to various crises we have had in the past, almost all of them based on either correctly or wrongly judging Fed action, have had a bounce and then a retest.

So, I suspect that we could get a retest possibly within the next month, of the lows that we saw in August, on August 16 and August 17, in various markets around the world, before the Fed stepped in. That to me is the most likely outcome in the next month.

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