Volatility will be the theme for next 2-3 yrs: Religare Cap

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The general consensus right now is that the uncertainty in global markets is likely to trickle into equity markets in Asia. The question really is how soon.

Tarun Kataria Chief Executive Officer of Religare Capital believes that our markets will see a high degree of volatility over the next 2-3 months which is likely to continue into the long term. "I reckon for the next 2-3 years, volatility will be the theme and therefore the way you trade the market, the way you invest in the market will be perhaps a little bit different than it was of the last 5-6 years, where you bought something you held it for an extended period of time. Now perhaps it is a traders market. Some sort of change we need to see in investor pattern," he said in an interview to CNBC-TV18's Udayan Mukherjee and Sonia Shenoy.

He however ruled out a bubble in the equity markets like in the year 2007. "The valuations are fair but liquidity will support the market," he explained.

Below is a verbatim transcript of his interview. Also watch the accompanying video.

Q: What is your sense of what lies ahead for global equities over the next two-three months?

A: What we will see over the next two-three months is clearly a high degree of volatility. There is still a fair amount of uncertainty with what is happening with global macroeconomics. That will trickle into equity markets in Asia; it will trickle into the Indian equity markets. I think volatility is the thing that we will see beyond the next couple of quarters.

I reckon for the next two-three years volatility will be the theme and therefore the way you trade the market, the way you invest in the market will be perhaps a little bit different than it was of the last five-six years, where you bought something you held it for an extended period of time. Now perhaps it is a traders market. Some sort of change we need to see in investor pattern.

Q: Volatility has been quite low though over the last one year whether it is in India or overseas. If you track the VIX overseas or the ranges that we have been forming, volatility measures in India, they have been remarkably low. Do you think that is about to change?

A: The VIX in particular - if my memory serves me right - peaked in 60s or the 70s. The point is there will be Black Swan events, fat tail events that will come from time to time that will cause those kinds of spikes in the VIX or indeed in volatility. The other thing to think about is that things are moving in ranges so if you need to trade the market perhaps, you need to be trading in a range. I think that is what we will see over the next few quarters.

Q: There has been a lot of liquidity sloshing around in our market and this part of the world. Do you think any of that can lead to the kind of bubbles which we saw in valuations at the end of 2007?

A: There are two things, there is a concept of liquidity and there is a concept of leverage. Yes, there is plenty of liquidity in the global markets and indeed in India, but the leverage that was available, whether it was to hedge funds or to other investors to chase markets higher, that has gone away. If you look at what happened to oil peaking at USD 144 per barrel, a lot of hedge fund activity driven by leverage that was available to them. I think those days are gone. So yes, while there is liquidity, there is less leverage. It is a subtle difference but a major difference.

Q: You don't think that, that kind of liquidity which is available today will necessarily chase valuations or chase stocks and drive it up to the kind of valuations we saw before the market topped off last time?

A: Not to the extreme level that we saw the last time. Tthe leverage that we saw in the global community, the global hedge funds, that is not available. Those extreme spikes, those extreme bubble-ish developments - I think that is not going to happen for a while.

Q: Is this a trending market according to you which will be characterized by shallow corrections but gradually upward moving ranges, as we have seen over the last one year or do you think that pattern could change?

A: That is probably what we will see because at the end of the day, liquidity overrides everything. You can have a down draft but the liquidity is there, the money is there sort of reimbursed. You will see patterns because valuations are, I wouldn't say stretched but probably fair, which means the risk is for a few days on the downside but then there is liquidity to support the markets. Therefore I think you are seeing this 14-18 pattern in the Indian markets and the same for many of the other markets, which over the last few months hasn't materially gone anywhere.

Q: The kind of performance that we are seeing in India and on many days the disconnect that we are seeing with the Western world, do you think is indicative of the fact that the better growth dynamics are being recognized or do you think it is just performance chasing money and we are delivering ourselves by talking about decoupling?

A: It is a bit of both. With 8.8 GDP growth, earnings in corporate India growing much faster than the rest of the planet, liquidity at the same time, there is enough money going into emerging market funds. And where do they go to? They go to India or Indonesia. The bloom is probably off the China rose for the moment. So yes, it is money chasing India because it is an emerging market story but it is also chasing India because it is a tremendous story with earnings growth, GDP growth, a billion odd people, rural growth and urban growth, it is all sort of happening at the same time.

Q: Do you see anything happening between now and the end of this calendar which puts a scare into people? That is one thing which has been absent, people are not scared, they might be skeptical, they might be waiting for a correction, but at no point in the last one year has there has been any sense of panic?

A: Ultimately you can never predict these things, but what is visible to commentators, visible to folks like us who are in the market, there is nothing that is on the horizon that would scare the wits out of anybody. Obviously in the Indian context, the spectrum inflation was something that was hanging over us but I think the Reserve Bank of India (RBI) has done a tremendous job in managing inflationary expectations and that is reflected in whether ten years or the trading over the last few weeks and months.

In the global markets obviously it will be a terrorist event, but it will be a short spike. The US and the European macroeconomic conditions are well priced in. Inflation is unlikely there, deflation probably a small chance. I cannot visualize something that is going to spook us for an extended period of time.

Q: Do you think Europe is okay though? Periodically we get these small spikes of bad news from Europe. You don't think any of them leading to cataclysmic kind of an event over the next three-four months?

A: I don't think so. There is recognition that the Lehman crisis should never happen again. I think they will bail them out, they would provide the liquidity as they have. The scare that we saw over three-four months ago is unlikely to repeat itself. Yes, it will provide dips and opportunities to buy but will there be a cataclysmic event, I don't think so.

Q: What is your own assessment of when domestic money starts flowing in a serious way because so far this leg of the rally has been led by the global money? When does domestic money get into that?

A: Tough to predict but I suppose if you watch trends, I think the domestic guys tend to be there when there has been 7-8-10% sell off. In a sense again as liquidity and domestic buyers are the floors to markets as they reach 15,000-16,000.