Bailout blues can overwhelm N-win

Valuations getting attractive, but buyers?

Success is not final; Failure is not fatal. It’s the courage to continue that counts."
—Winston Churchill

MUMBAI: Dow Jones wobbled on take-off Thursday, shedding more than 200 points despite partial clearance to the $700 billion bailout package by the US senate, which is desperately needed to unclog global credit markets.

Flat-to-positive Europe was quick to take cue, and immediately went into the negative.

The worries are valid: theoretically, the bailout package still needs clearance from the US house of representatives, which had rejected it on Monday.

Friday night (India time) thus becomes crucial for world markets. A rejection redux would be a terrifying proposition for all asset classes.

Remember, some house representatives are due for re-elections in November and are worried about retaining their seats. Supporting a bailout is not in their interests, therefore. Who’ll answer voters’ questions?

Will that fear translate into overbearing bear-hug at the local level?

The passage of the Indo-US nuclear deal is a positive (at least for the capital goods and power sectors), and the Senate passage of the bailout package affords hope.

Jayesh Shroff, fund manager-equity at SBI Mutual Fund said a successful bailout deal can offer a short-term positive trigger.

“When cleared, it should inject some liquidity. However, structural issues remain as do problems with rising bad loans in the US,” Shroff said.

If the credit markets get irrigated and more banks don’t go under in the US, the attention on Wall St will shift to unemployment, housing and GDP, feels the Street.

Naresh Kothari, co-head of Institutional equities, Edelweiss Securities expects a short-term relief rally locally. “A part of this we have already seen in the past two sessions.
But liquidity constraints need to stabilise in the US,” he said.

S Naganath, president and chief investment officer of DSP Merrill Lynch Mutual fund said while clearance to the bailout package will restore some confidence, the banking issues in Europe also need quick redressal.

“It is quite likely there could be an interest rate cut by the European Central Bank and by the Fed. The Fed is expected to meet in late October. Concerted rate cuts and liquidity injections across the globe alone can allay concerns about the system and hopefully restore confidence,” Naganath said.

But for a rally to occur, foreign institutional investor money is crucial. Analysts don’t see it coming anytime soon due to elevated levels of risk aversion.

There is another structural change —- key investment banks such as Goldman Sachs and Morgan Stanley have become Fed-regulated entities.

That means little or no leverage, going forward. Which, in turn, means the FII inflow of $17.2 billion seen in 2007 may remain the watermark to beat for a long time to come.
Yet, Credit Suisse analysts Nilesh Jasani, Arya Sen and Deepak Ramineedi find valuations turning attractive.

“Valuation attractiveness is in the eyes of the beholder, particularly both when prospects of future earnings and usable long-term cost of capital are difficult to ascertain even in a broad range. Yet, it is likely that history books will record some time around now as one of the best entry opportunities for long-term investors,” the trio said in a report last week.

The retail investor, however, is unlikely to take bait, singed as he is by the 9-month meltdown this year. He seems happy with the 10% rock-safe returns on fixed deposits.

That leaves domesticinstitutions as the lenders of the last resort for the Sensex.
Kothari of Edelweiss says the major local concern remains liquidity.

“If there is no return of Big Cash into the market, we are unlikely to see much upside. Domestic institutional investors have been lending a shoulder but major liquidity is not coming in from them. That’s because they are on wait-and-watch mode,” Kothari said.

Then, of course, there is the second-quarter results which start getting announced soon.
Though expectations are already low, negative surprises can prove nasty in these prickly times.

“Domestically the focus is going to be on results. The swing in currency and the cost of raw materials is definitely going to be reflected in the numbers. The effect will be felt across sectors,” said SBI Mutual Fund’s Shroff.

The key to longer-term upturn remains stability in the so-called developed markets.
But DSP Merrill’s Naganath portends fresh weakness in November.

“I think environment will remain volatile in terms of stock prices and credit. Not until first quarter of the next year can we say the worst is behind us. Thereafter will begin the rebuilding of confidence and risk appetite.”