Bailout inadequate; see larger offer ahead: Tata MF

Ved Prakash Chaturvedi, MD, Tata Mutual Fund wonders whether USD 700 billion would be sufficient and expects a larger bailout package in the future.  

He does not expect the Indian market to rally in a hurry due to the bailout approval and remain in a trading band as there are still several concerns on inflation, interest rates, politics, the liquidity crunch, FII outflows. He sees more volatility in the market.    

Here is a verbatim transcript of the exclusive interview with Ved Prakash Chaturvedi on CNBC-TV18. Also watch the accompanying video.

Q: What's your initial take on the deal? Is it in-line or above-line because we seemed to have that rally over the last two-days in our markets in expectation of this deal being passed?

A: As you rightly said, the Indian markets have been anticipating this deal and my sense is that two questions come out of this. One is that is USD 700 billion enough and if it is not enough what is the size of the problem because as more newsflow comes on this, we might again see a bout of volatility and if you hear the newsflow from the US, the feeling is that this is just the beginning and there may be a larger bailout package that may be required.

The second point I would like to make is that in my view it is now clear that policy planners whether it is in the US or in other parts of the world are very clear that they would do all that is required to be done to inject liquidity, to bailout banks in difficult situations. So the focus will now shift to on earnings growth as far as stock markets are concerned in India and overseas and particularly in India since earnings for September and December will be very closely watched.

My sense is that a lot more stock specific action will be seen in the future.

Q: For our own market in the near term, does it do anything to pull us out of the range we have gotten into, in fact into the lower range we have gotten into?

A: Clearly, markets will not runaway from here because there are several concerns related to our domestic markets - inflation, interest rates, politics, the very tight liquidity situation that we have here, FII outflows - all of which will cause concerns. So I would suspect that markets would still remain in a trading band. May be the lows that we saw in the recent times may not happen for some time if this bailout package is effectively implemented. However, my sense is that there is more news flow in this area to come and I think we should brace for some more newsflow from overseas. My feeling is that this is not the end of the matter.

Q: What do you think the market will have to live with then over the next few days? Do you think will be as intensely volatile as it has been or would we just go into a flat phase as some of these global issues get worked out?

A: My sense is that it would be a trading band as you rightly said. My sense also is that a lot would depend on how earnings growth pans out and let me just make one point. If you go back to let us say 2000 and you see how analysts revised earnings numbers, it always happens with the lag. Markets reflect forth coming earnings growth earlier than analysts revise them and that same thing will happen again. Markets already are reflecting in stock prices potential earnings growth numbers which analysts will revise in the future. So my sense is that may be we will be in for a season of earnings downgrades and hence more stock specific news will drive our markets as for the moment concerns related to newsflow from overseas recede into the background.

Q: Do you see this outflow situation stemming for a little bit? This package has come in, in the very near term do you see it stalling the outflows this market has been seeing particularly from the foreign front?

A: Let me just make two-points there. One is that I was speaking to a very large US hedge fund recently and the situation is that the US hedge fund industry size currently is let us say at USD 5.5 trillion, will get watered down to someway in between USD 1-2 trillion. If that's going to happen and that magnitude of de-leveraging is going to happen, then my sense is that we have not seen the end of the outflows. Outflows will continue from our markets and from other emerging markets for the simple reason that investors want their money back.

But let me make another point. If you look at the last nine-months, the difficult period in the current calendar year, we have seen more inflows into domestic equities from domestic institutional investors (DII) like mutual funds, insurance companies, banks and others than the FIIs have pulled out and my sense is that that trend will continue. My first hand feel for Tata Mutual Fund is that for example we have had inflows almost everyday in the last nine-months and I am sure there is similar experience with others.

So the good news is that actually I don't think it is a challenge of fund flow. I think money will keep coming in. It is more a challenge of sentiment and that can only be lifted by fundamental revision in performance of companies and earnings growth numbers which are yet to come and I would think that the focus will be on that. The issue of outflows will continue but at the same time there would be inflows into equity markets from DII.      

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