India can fall 5% more from here; upside capped: Blackridge

Arindam Ghosh, MD & CEO, Blackridge Capital Advisors feels it will be tough for India to attract more capital in such a low liquidity scenario. He sees the upside for the market capped but cautions of another 5 percent downfall from current levels.

Also read: FIIs cautious on India; eye ICICI, HDFC Bk, L&T: CLSA Below is the verbatim transcript of his interview to CNBC-TV18 Q: Do you see this emerging market (EM) outflow situation continuing for a few more weeks because it seems to have hurt most EMs including us quite badly over the last fortnight? A: Globally we are clearly in a risk-off environment and what we are seeing right now is the beginning of the end of easy money regime. Our sense is that that risk assets are going to stay extremely vulnerable and for risk to really perform the data from US will have to significantly disappoint. We saw the data which came out overnight and how the markets reacted. Our sense is that market is going to stay extremely sensitive to data and there is going to be a lot of volatility around that. I think flows in and out of EMs will be guided by data points going forward. Q: The most crucial data point for us is the way the currency has slipped through this month. We have heard of Exchange-Traded Fund (ETF) outflows but are you beginning to hear about long-only funds as well facing pressure because of the rupee having breached 60? A: So far it has been primarily the ETFs which have actually been pulling the plug out. That is typically always a trend. We really have not seen serious outflow from long-only funds. Overall when you talk to overseas investors I think there is a lot of pessimism around what is really happening around the globe and particularly India, given the way the currency is currently poised with the threat of the Current Account Deficit (CAD) looming large. The way and means of financing the CAD is increasingly looking challenging. Our sense is that the biggest challenge or nightmare for India would be to attract capital in an environment where liquidity is incrementally going to get tightened. One has to ensure that the fundamentals improve particularly in a year when we are headed towards an election. At the margin fundamentals have started improving on the back of various measures that have been taken. However, the level of confidence and conviction with foreign investors is something which has been wavering a bit in the recent past. Q: How are you approaching some of the sectors where there were higher valuations as also higher ownership patterns - the banking space, the pharmaceuticals, a little bit of the consumers? A: Typically in an environment of excess liquidity you would see across the board movement in stock prices. Typically it is large cap followed by midcap. We have seen valuation really hitting the roof and going beyond particularly in staples, in IT. The currency has been a windfall. Typically these have been the places which have actually found favour. Private sector banking recently has been underperforming a bit. The challenge would be more from an asset allocation point of view in a market where it is really difficult to take a call on the extent of the movement on the downside. The upside looks fairly capped because there are no big triggers which we really feel can take the market up. However, on the downside the risks are quite substantial. Earlier when there was a certain sense of denial in what is happening in the market we were of the view that markets may actually correct from here. Our view also consistently has been that correction in the market is something which is going to be healthy and that is what we have seen now over the last couple of weeks. We believe that some more could be in the offing and the way some of these currency issues and flows actually play out is also going to influence that as well. Q: How much more of a correction is possible in your book? How much do you think valuations have adjusted and how much more could there be to go? Is there a fear of an overshoot on the way down in the adjustment that you are talking about? A: Broadly if you look at how the flows have actually come in post-crisis, how the central banks of the G7 countries have put together almost USD 10,000 billion that is a lot of money. Typically what happens is the build up of the asset prices is always gradual, but the decline in asset prices can be extremely sharp and quick. It is hard to predict how much or what would be the exact extent of fall from here. We have already seen about 10 percent. Probably another 5 percent from hereon is not ruled out or it can even get worse. However, the caveat is that it will help the markets to align a bit with where the fundamentals are today. That has been our view. If we are today growing at half the rate, if we cannot have a capital market which on the back of Foreign Institutional Investor (FII) money has actually overshot on the upside, so the fall can be dramatic. One needs to stay a little cautious. Our sense would be as I mentioned earlier at the cost of repetition that asset allocation is really going to be the key. Q: There is a fairly important policy meet this evening around the gas pricing issue. How important do you think it is going to be both from the market's point of view and for people to feel a bit more enthused about policy impetus in this country? A: It is going to be keenly watched. The expectations are a lot more dependent on how it is really tackled between the various ministries. We are obviously aware of the fact that doubling of the price may actually lead to sharp increase in electricity cost in fertiliser subsidy. If some kind of a mid-path situation is found, that will be taken positively by the market.