Manish Chokhani, MD of Enam Financial said the correction has given a long-term investment opportunity.
He rubbishes the possibility of a bear market, because, he said, credit has to become extremely tight in a bear market, which is not likely in India.
As of now, he said, "We remain in a corrective phase in the bull market."
The steep fall is due to the leveraged investor, he said. USD 12 billion of Reliance Power IPO QIB money will come back to the markets, he expects.
Excerpts from CNBC-TV18's exclusive interview with Manish Chokhani:
Q: How high are the chances of bear market in 2008 now?
A: The word bear market is used very frequently on your channel by a number of people and I would like people to step back and think - to fulfil necessary conditions in a bear market, credit has to become extremely tight, money has to become extremely tight and one cannot make that case in India with the way our currency reserves are and with the way RBI has managed the liquidity position here. We are heading for a series of rate cuts because liquidity remains high in India.
Bear markets typically come about when one cannot get money for the love of God; that's not likely in India et al. So we remain in a bull market; we remain in a corrective phase in a bull market. One would have had three sources of potential supply to the market; one was the prop books, IPO and the leverage positions and all three have coincided fabulously in January to give what I think is a great buying opportunity to investors.
Q: Are you surprised that the decline or the downward move has always been led by emerging markets?
A: I think I said it very candidly; I was surprised with the speed of the rise and the extent of the rise and I am equally surprised by the speed and the sharpness of the fall. Typically, these are caused by leverage positions because it's the marginal retail buyer who buys it 10-20% up and it's the leveraged speculator in the market who is forced to sell it down 10-30%. No ration investor or no fund or no industrialist goes and sells or buys his stake in that kind of a radical manner.
Q: What lies ahead in 2008 once you look at the global situation? How do you see the next eight-ten months panning out given where we are today?
A: It's consistent with the whole cycle theory I've had that if the US is going to die and the response to that will be, they will pump more and more steroids into the system, the move of Fed yesterday, of cutting 75 bps at one end, made people panic, that is it really worse than what we thought.
Why the Fed is behaving in such a knee jerk fashion? What it does is create a lot of liquidity back in the system and lower cost of borrowing for people and throttle markets and global economies if the cost of credit is too high and money just isn't circulating.
So if that money supply is created, once people's nerves have calmed down they look around and say, "now we have got all this money where do we go." There is no point being in the US because if one is staring into a recession and at the margins, one may buy few stocks here and play a bounce, but if there is probably 12-18 months of pain the US, let's look for the best performing asset classes. By definition, it's going to end-up back in hard assets because the financial sector in the US has destroyed confidence in the banking system whether its Citi, Merrill, UBS, JP Morgan, whoever they all had such severe crises there that the average bloke on the street is going to say, "I am much better off holding hard assets; I will hold property maybe not in US but elsewhere in the world, I will hold commodities, resources, oil, gold and emerging markets which is where the growth is."
I would think it will take three-four months for people to get their nerves back in order before they come back in a significant way overseas and put money back to work in these markets, which are the only places where one is going to get growth.
Q: To flash out the decoupling debate, the concern is the fact that China has started showing signs of lesser growth or just easing off the peddle in 2008. Do you expect there to be any collateral damage for a market like ours in that scenario where it's more about China and less about the US?
A: You are absolutely right. It's just the way the stars aligned in January was perfect. In the sense that you are a buyer, someone is holding a position that wasn't right, you have a US slowing down and you have people getting spooked with that. It had a sense of frustration that the selling began in the western markets; at the same time oddly enough in China you have an economy which is growing at 11-12% and they needed to pull the throttle back to bring back the growth to 8-9%, which is what we all aspired to.
So at one end seeming slowdown in the China and at the other hand complete slowdown in the US and it just stars are aligned wonderfully that people used this month to get spooked. But if one sits back and thinks rationally, China slowing down from 11% to 9% is a great thing to happen because it will make that economy far more sustainable.
Similarly our market, it's been over exuberant, we been frothy, we been ahead of ourselves, we may blow out and get into bubble territory; I am glad that we have come back, because this sets the stage for more stable up move in our markets as we go ahead. WIth decoupling, when the richest guy in the world will get completely sick, it's not hard for everyone else to feel a chill but once you feel the chill you realise six months later, it's my elder brother who has got fever, not me and I can still go out and continue to improve my prospects.
And I think it will take that amount of time for people to figure out, that end of the day do I want to be 3.5% US economy with a currency which may probably depreciate over time, growth prospects looking very grim and as oppose to economies where earnings growth will be upwards of 15%, currency may move 4% and in four years, local people will double their money and in all likelihood in three years foreign people will double their money. So don't wish this bull market away as yet.
Q: If things look good five-six months from here, do you start accumulating largecap blue chip names or do you go back into the midcaps which have collapsed 50-60%?
A: I think people are not yet focused; the fact is we collected USD 120 billion in the Reliance Power IPO; that money will come back to market in first week of February. Just the QIB deposit was USD 12 billion, that money is not in the system as yet; in ten days money comes back into the system from there.
What people are suffering from right now is absence of leadership, because the FIIs don't have money yet to put in, the local speculators have got hit, the domestic funds were largely invested, and the insurers are the ones who have the bulk of the money. So some leadership is required from someone to step-up to the extent people we know have done and they are continuing to do it. One is seeing that buying happening in the market and its classic market cycles where in the beginning, the industrialists used to take the big risk, puts the money down then the deep value people go in and buy it, then the growth people come in, then is the momentum fellows who hog the headlines and finally the speculators and the retail investors who go and make the tops in the market. You are seeing some amount of sell down from those hands to deeper pocketed hands and the distribution takes a bit of time.
So don't expect things will clean out in two-three days and we will bounce back 2,000-3,000 points immediately. But if you sit back and think in four years, this index will double its earnings, will go from 1,000 to 2,000. Even if the multiples remains the same, we are going to double and that's 15% CAGR from here and if we are lucky, we grow earnings at 20 and expand multiples, we will probably double in three years from here. So money is coming back, there is lot of money locally as well, there is USD 15-18 billion of insurance money, which will still come in. I would still bet that there will be USD 10-15 billion of foreign money to still come into India in the current year. The proportion will grow and the good news is that the supply from the F&O side and hopefully from the over exuberant IPO side will also probably slowdown. So on balance if you are an investor, go in and enjoy yourself.
Q: Enam is involved with the Reliance Power IPO, so (a) is there a process to release some of that money in the system for the IPO, a bit earlier than possible as you indicated and (b) there are fingers being raised that the kind of valuations power was trading at and Reliance Power perhaps to a great extent was being blamed for that?
A: I cannot answer how fast the process will take, though one sees movement to get that done quickly. In any case, that money is due back around the first week of February, so it's barely ten days away and it's sizeable to come back from there.
On the question of valuations, you and I are not the people to argue because reality of the matter is QIB has filled that book USD 120 billion and they are supposed to be knowledgeable investors who put money there; HNIs have put in 200 times of the issue, retail has put in 15 times of the issue, we ourselves collected the highest, and I think USD 32 billion from the QIBs over there.
Who am I to argue if people are going to go and put their money in there?
Like I said, a market comprises different categories of investors; the industrialists who may buy it at x price, there are value investors who may buy at x+5, there are growth investors who would buy at x+10, there are momentum investors who would buy x+20 and then there is retails which buys at x+30. So if you don't have that eco system going and that's what markets are about, so why should one person say prices are too high and prices too low; reality is out and it was Rs 7,50,000 crore mobilised.
Q: What about power as a sector? Do you think the froth has been skimmed off from the secondary market?
A: It's not just a sector or another sector; the fact of the matter is that India will double its earnings in three-four years, foreigners will keep coming, insurance will keep coming at the margin. It makes people very complacent and especially the speculative crowd, which goes in and builds position in the futures market. From time to time, you need that cleaned and whether it happens in a particular sector, whether at some point one will say it's real estate at other point it's power, other point you will say brokerages, some other point in the past we would have said it would probably have been telecom, retail and so on.
Every new sector that comes out, people grapple with pricing that sector and you get this excess shootout of valuation. For instance today, the market still grapples with how to value insurance companies and the next week it may happen over there. But each time you get this up move and then down move and then people figure out how best to price that particular sector; things then carry on from a fundamental basis over there.
What is the rational for people to come forward in the first place from the days of NTPC, Power Grid, HPC, Power Finance and Reliance Power? It was extremely popular with foreign investors because, with a 15% assured return in a market where the currency is also hopefully going to appreciate 3-4%, it's a 80-90% assured return business in their mind coming from markets where things looks extremely uncertain.
So you could afford to buy it at two-three-four times book, given their interest rates locally even while we domestically we may think of it as being 2-2.5 times book. It's that pricing dilemma which was going on; not just power, but real estate as well and increasingly it will happen with our financial services, insurance, brokerages, financials, wealth management providers and so on. So don't be surprised, this is not going away in a rush.
