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Jun 22, 2013, 01.44 PM IST | Source: CNBC-TV18

More pain in store for most assets; sit on cash: Udayan

Udayan Mukherjee, managing editor, CNBC-TV18, believes retail investors have no asset class that is likely to post good returns and that one should stay out of the market until the global markets see some stability.

The current correction seen in the Indian equity market is not due to domestic reasons but widespread negative sentiment globally believes Udayan Mukherjee, managing editor, CNBC-TV18.

Mujherjee says global adjustments have just started in all markets after Fed chairman Ben Bernanke said the central bank will taper monetary easing worth USD 85 billion by the end of the year. He says no one has an inkling on what the implications of this move maybe and unwinding of trades have now put a lot of pressure on global bond markets, emerging markets and their currencies. 

Additionally, Mukherjee believes retail investors have no asset class that is likely to post good returns and that one should stay out of the market until the global markets see some stability.  After the hammering seen in bond market and gold, he says investing in these asset classes too will not prevent an erosion of capital .

"So what do you do? You just can’t say with 9.5 percent inflation in the cities that you will just be in fixed deposits. Post tax, what are you left with in terms of fixed deposit. You are not covering inflation. So, the one call one you can take is - as long as this global volatility continues, you want to preserve your capital," adds Mukherjee in an interview to CNBC-TV18.

Below is the edited transcript of Mukherjee’s interview to CNBC-TV18.

Major global adjustments are taking place and they may have started this week. So this week should not be treated as any other bad week in the market. Everybody is trying to figure out what the ramifications of what happened this week globally could be? Nobody has a precise answer.

Some are closer to the truth than others but I don’t think anybody can put a finger on what kind of exact global financial adjustment is required over the next few months because this is a very complex thing.

We can talk about what is going to happen, but essentially what is happening is that a lot of trades which have been on in the global financial space over the last three-six months are beginning to unwind. It is not that we simplify it by saying people are taking dimmer view of emerging markets because of growth or valuations, currency movements or whatever reason.

The truth is that what is happening right now is also very technical in nature which is the connection between the US bond yield and the trades which were happening globally- the leverage trades. It is complicated financial science.

Whether you can argue of what Ben Bernanke said should not deserve such a big reaction as a lot of people have noted over the last couple of days but I think what’s happening is that a lot of trades have begun unwinding and that is putting a lot of pressure on global bond markets, most emerging bond markets have lost a lot of money that has put an enormous amount of pressure on most emerging market (EM) currencies.

This is not about India at all. In the past many falls and many weeks have to do with Indian current account deficit, Indian policy, Indian earnings but this week has been very global and nobody has been spared. Hence, it is very difficult to come to a conclusion on when this global adjustment would come to an end in terms of capital flows, when the pain therefore will stop and when one can come out and catch this falling knife.

I think this is more complicated than just going out and saying L&T had bad earnings, stock fell 5 percent and now is the time to go out and buy it. It is something which we understand very little of.

On asset classes and stocks

Investors’ problem now is what is to be done with their money right now. It’s a legitimate question to ask. At different points, when equities were doing badly, one could have thought of alternatives.

Fixed income had a great run in the last 18 months but look at what’s going on in the bond market right now. In the last few days yields have moved up, one would be very uncomfortable as a bond market investor over the last few days. Look at gold - that has got whacked once again. One can’t take a nationwide call on real estate as different pockets perform differently.

So what do you do? You just can’t say with 9.5 percent inflation in the cities that you will just be in fixed deposits. Post tax, what are you left with in terms of fixed deposit. You are not covering inflation.

It’s a difficult time for most domestic savers. For now, they have given equities the pass and they have been able to do quite well if they had stayed in fixed income and gold has done well as we all know till three months back. However, right now we are entering a phase where if one hides in the same places- gold and fixed income, bonds or fixed deposits, then one is going to erode capital over the next few years. The one call one you can take is - as long as this global volatility continues, you want to preserve your capital.

It does not matter whether you get 2 percent less than inflation. So, you take a notional call that my Rs 100 at the end of the one year will be worth Rs 98. But look, most of your capital is protected. You will not be in a situation where your Rs 100 has gone down to Rs 80. So, everybody is in a bit of a tizzy right now. When these things play out, people flock towards capital preservation more than anything else.

I think people will still be leery of equities but I am sure we will talk about it in the next few minutes. For the first time, I actually was waiting for this to happen because you just could not construct a scenario of a bull market without global markets getting whacked once because of this liquidity adjustment. This was an event which was always going to happen. Whether it happens now or it happened in January or it happens in June next year. One could see that this roadblock was coming. Now, when such things happen, you want it to happen sooner rather than getting dragged on knowing full well that it would happen at some point in future. So, I am going to put a positive spin on this today and say that what is happening this week may just go on to inflict a lot of pain on most asset classes over the next few weeks is actually a good thing for people sitting on cash because there is now way you could have wished away this adjustment in the future.

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