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Talking about the strategy to adopt in markets now, Akash Prakash, Director of Amansa Capital PTE believes it's too late to sell, but instead one should start buying with a long-term view.

N Jayakumar, CEO of Prime Securities also agrees. He said the market sentiment may be negative, but it is a good time to buy.

He said if the RBI allows the rupee to appreciate, FII flows can be attracted.

Prakash thinks there is still fear of protracted recession is the US. But markets will reprieve by year-end led by the Fed move. He said renewed flows into emerging markets will start after the global risk aversion subsides.

Excerpts from CNBC-TV18's exclusive interview with N Jayakumar and Akash Prakash:

Q: Last time you were on the channel you were singing a song, are you ready with a different tune for us today?

J: All I can say is that bulls may have been singing a song, but now they are facing the music. I think there is no denying the fact that those of us who have been pretty bullish have been definitely caught on the wrong side, because I think the fall in the market has been significantly more violent in terms of price impact than any of us predicted or expected.

But on one hand while we can look back and say that we were caught on the wrong side, I think it is important at every point in time to figure out what exactly has happened. I think the challenge is to see what happens going forward. One of the things is that virtually from no quarters are you being given any hope whatsoever. It is like 'no hope' situation from every quarter. Maybe at the end of the day that is a complete mirror image of what we saw between November-December-January, when markets could do no wrong; it was ‘getting decoupled’ and it was going its own sweet way and nobody wanted to hear anything except buying and today nobody wants to hear anything except getting out of the market.

Everyone out there is eagerly predicting 10%-15%-25% downside. But I think if there is one hope it is the fact that there is no hope in the market consensus. We can elaborate on that in terms of specifics, but to my mind I think there is capitulation across the board. The travesty of this all was yesterday when the FII numbers came in at a small negative Rs 5000 crore, the local buying was Rs 5000 crore, the futures may have been Rs 100-200 crore positive and yet the market closes 5% lower. If this is not a complete cataclysmic collapse of bulls and people capitulating at every stage, I think nothing that I have seen so far mirrors this kind.

Can it get worse? Frankly in momentum of this kind multiple things can happen. But if you ask me, I think it is time to be buying out there.

Q2: What’s your sense? Is it looking like the pain could be longer and deeper than what most would have anticipated earlier?

AP: I think if you look at what’s happened internationally in terms of how bad the credit crises and credit contraction the US has been, it’s obviously been a lot worse than most people expected it and the problem is it’s also cascading - it’s going across. It started off as a problem in one part of the credit market – subprime; it’s become a contagion, it’s across all credit asset now; equities as well and therefore one needs to understand that it’s a serious issue, serious problem - the US is clearly in a recession, the debate is how big and how protracted.

But having said all that, I would tend to agree with Jayakumar and we been slowly starting to buy now in the last couple of days and I think that is what I would advice people depending on the horizon; if you have one-two year horizon, then it’s difficult to say what will happen. If you take a longer-term horizon - if you genuinely have 12-month above horizon, then the risk reward is in your favour to slowly start buying now and I recommend buying slowly because I think there is a small chance; maybe 10-15-20%. But there does exist the possibility that something really bad happens in the sense there are large banks goes under or large fund winds up. So you need to buy systematically; slowly buy what you like which is cheaper on absolute basis.

But I think it’s too late to sell from a longer-term investment horizon and that opportunity was there in December-January. I don’t see how a long-term fundamental investor now will be selling this market at these prices and if they force to for other reason, redemptions and other things. So my advice will be - we should start buying; pick away slowly because there is enough time and there does exist a small possibility that something bad happens. The risk reward, in my mind, favours buying now as opposed to bailing out and just taking money home.

Q: Amid all this global purging, the question that people are asking - is there an end in sight for a lot to people; they have got their eyes on the last few months of this calendar year - since the recession will play out, they feel the corporate performance will start picking up again - is there a timeline you could put to it - I know it's difficult. But is there a timeline you can put to how long and protracted this pain will be?

AP: If you look at the normal indicators where a normal plain vanilla US recession lasts for about between 9-15 months; but normally for about 12 months peak to trough, market falls to about 20-25%. So if you take those type of metrics and assume if this were a plain vanilla type of economic recession or slowdown or standard one brought about by the Fed hiking interest rates in a normal situation, then the market tends to bottom out by 5-6 months before recession itself. And if you think recession is by the end of this year, the markets would bottom by June-July or maybe August latest. But the problem is that there is a risk in saying that this is not a normal plain vanilla US recession, given what’s happened in the credit market, given how indebted the US consumer is.

There is a possibility that this is a much more protracted period of economic slowdown in the US than is normal - that’s what's holding people back. If it is a normal scrip, you should be arguing that by June-July, the markets would have bottomed out and by the end of the year, the markets will be up and if you take a normal scrip of how recession in the US plays out in terms of time frame and peak-to-trough market decline; the problem and the fear is that this is unprecedented in terms of the type of contraction, the credit market, the type of contingent in the financial system. So nobody is sure how long this will last and how bad it will get and that’s why I think people are hesitant to buy because there is just a total sense of uncertainty.

People are unable to predict how bad this will get; they are unable to predict how much longer this will continue and that’s why you are seeing this kind of buyers strike, where nobody wants to touch it because they just think that we don’t know and that’s the problem. My own perception is that by the end of the year, things would be definitely better than where they are now and the US is throwing everything it can fiscal policy, monetary policy, direct intervention in the credit markets by the Fed itself. So there is a reasonable chance by the end of this year that things will be much better. So I would recommend that you should be starting to buy slowly. But that is just a view and you have to accept that this is to a certain extent, an uncharted territory.

Q: In a sense this week has been a multi-pronged attack not just because of the global markets, but there was a lot of disappointing macro-economic data, couple of the big corporates also came out with disappointing news. Are you getting concerned about that front of it - the earnings performance now?

J: Let me address these two things separately; I think the big issue that has been discussed is IIP and the slowdown and taking a different view for a moment, which is that had we come out with IIP numbers of 9.5% and inflation at 5 going to 5.25 or thereabouts we are going to be put back into same category as China, which is unable to control its growth and going through inflation at the same time.

I don’t believe anybody for a moment is saying that India is de-growing and so I am of the view that there is a slowdown. Just that maybe some of these numbers were more 'shocking' than what we expected.

None of the capital goods companies like Voltas, L&T, Punj Lloyd, the JPs and the BHEL, are talking about a growth rate less than 30-40%. Maybe their business plan has now gone beyond India, into the Middle East etc, but the bottomline is none of the companies are talking about a number which is in-sync or actually marries well with the 2% number that we talked about in that particular space.

I am not an economist; I am not able to square up these numbers but intuitively when we talk to the majors in this field, they are not giving us the same sense. There is going to be a certain price lead on the commodities front, impact on margins which will actually impinge as far as margins of commodity oriented companies are concerned. But the fact is that this is already reflected in the prices.

It's not that we are still talking about 6,000 index on the Nifty and saying that will there be an impact. So I would like to believe that the fall of the 26-27% by which India is down for the year, which in a two month period has made it from the best performing market to the worst performing market somehow this fall has already presaged some of the numbers that have come through.

I feel there is one antidote, one policy decision which can help arrest the fall substantially compared to anything else. The dollar index at its all time lows collapsed 5-7% across the broad range of currencies. The RBI has actually managed so beautifully, actually mysteriously this time has chosen not to allow the rupee to appreciate. The simplest antidote for inflation is allowing currency to appreciate, because this is entirely in your hand. They've been using the Market Stabilization Scheme – MSS, new limits have been sort to actually help defend the dollar.

All this only indicates one thing that we must allow the rupee to find its natural level like its Asian peers and the lack of ability of the RBI to allow the rupee to appreciate is mystifying to say the least. A lot of the currency thing will impact in terms of even flows. Today the FIIs are not big players in the market in terms of net flows; the net flows are hardly USD 100-200 million at best on any particular day, but today they are also hurting because of the currency depreciation.

I feel that Reserve Bank of India is slightly slow in responses. Forget interest rate cuts, I think inflationary pressures, which is really an issue today, if that can be addressed in the face of slowing economy, I think it is not bad. Even now at current growth rates, the growth differential between India and the rest of the world is still as large as it was two-three months ago, where the world would have grown 2-2.5% and we are growing at 9% today, the world has reduced its growth estimate may be 0.5%-1% or maybe a de-growth in the US, which is what a recession signifies and we will probably grow at 7%. Ultimately it is growth differential that drives flows and not absolute growth and because China can’t control inflation and still grows is suddenly been bracketed with India, I think is a serious flaw.

Q: Give us a quick word on your expectations on emerging market liquidity over the next few months - we have not seen too much by way of selling over the last couple of months from FIIs perhaps because of their inability to sell in shallow markets. Do you think that tide will turn in a couple of months and you will see good appetite for emerging market equities or you think we will have to live without the support of strong foreign flows for longer than we envisage today?

AP: I think it is linked to risk aversion in the sense that we have seen; about USD 18.5 billion of redemptions out of emerging market funds and in terms of data, which is about 3%-3.5% - the way EM gone from beginning of the year, it is pretty significant. So I think you will continue seeing redemptions as long as you had this elevated environment of risk aversion and people are nervous and worried about preservation of capital. So when you have high-risk aversion, people are going to take money from where they still have profits, which tends to be emerging in markets because the emerging markets had a fantastic run. So I think if that is linked to stability in the global financial markets in a sense that I think most of the clients we talk to still want to overall increase their emerging market exposure. They are not at a level they want to be in terms of the target allocation over the long-term perspective. But I think that you will see renewed flows to emerging markets only once we get over this panic type of environment in global markets, where people just want to take down risk across the board whether it would be in terms of leverage, in terms of beta - so in an environment where people are just trying to cut risk, it is unlikely you are going to see significant newsflows into emerging markets.

That said, by the middle of this year-hopefully the third quarter, this year that environment settles down. It has to because you are going to have much more worse consequences if it does not. Once the global environment settles down, I think you will start seeing flows into emerging markets again. But till the global financial markets settle down, I do not think you can expect to see significant flows into emerging markets because it is still perceived to be a higher risk-higher return type of asset category.

Q: Because you have seen more bear markets than I have, is this a start of something uglier, which we are not figuring out today? This is the first leg of it and typically the first leg even after the fall, analysts are generally bullish because they cannot see the reasons dragging the markets down in the first place. Do you think it could play out like that - at the end of this episode it will turn out to be uglier, but if we are sitting here today we cannot see it because we have come out of a fairly large stretch of being bullish for many years?

J: That is absolutely possible, anything is possible in this kind of space where so many new thigns are surfacing everyday. I just put a few things on the table for you. If four months ago I had told you that Citi Bank was going to take a USD 2 billion write off, it would have been compared with write offs taken during the Latin American crisis where they took write offs in the range of a few billion dollars.

If I had told you that two banks will take write offs of USD 2 billion each, it would have been larger than most write offs taken earlier. But if you play out three months and say just by the way USD 220 billion of write offs have been taken, does it really bother you or has the world come to an end? The answer is no.

I think the problem is surpluses are being generated in one part of the world-Middle East and oil producing countries are getting channelized; in some sense the world is sharing the hits taken somewhere else. I do not think anybody is washing this off. Let us put this in perspective - it is USD 220 billion, which is 110 times more than what people would have estimated as the worst hit six months ago without knowing something called subprime lurking in the background. Sure many of these markets are interlinked, they could have a cascading impact, but I believe what has played out is much worse than what people expected to play out. Yet we are talking about corrections of between 15%-20% in most emerging markets, India having done 25%.

Secondly, it could play out because many more things may emerge which we are not aware of. Fed clearly has rolled up its sleeves and said whether it is intermitting cuts, whether it is intervention in the markets and whether it is in terms of the government stepping in for bailout packages etc, I think they are willing to do what it takes. If flows do not come to India where do Indian flows come from? I think the answer is very clear, mutual funds. Today I think this point needs to be driven home are sitting on USD 5.5-6 billion cash, which I dare say is a higher amount of cash than they sat at more than 6,000 index. These are the same mutual fund managers etc many of whom are my very dear friends and I say this with equal passion to them.

For protecting the last 10% and getting a finer entry price in the last 10% are we going to say the originally 85%-90% can be at risk and therefore allow the self fulfilling thing to go down. Yes, if your view is that this is going to 8,000 and to that extent I completely salute Shankar Sharma who says that I believe that this is going to be a 4 digit index and therefore his view matches but if your view is that this could be 5% lower or 10% lower then as a mutual fund manager you cannot be sitting on 20,000-25,000 crore plus of cash in terms of a community as a whole.

I think the foreign institutional investor, in the recent last few weeks or last few days at least we have seen an emergence of a number of long only players. Private equity people who typically go for unlisted deals or go for private equity kind of transactions are in the market shopping around for blocks in the secondary market. There are many cases of technology companies being bought up by private equity players in the secondary market. I think the whole idea here is a new character of players is coming in. These players are a lot more patient, a lot more long-term capital and perhaps people who have got leverage issues of unwinding are selling out. I do not believe that churn is not happening but on the net level the FIIs are not to be blamed for this fall. Yes, the unwinding happened in January of the arbitrage book but at a net level I repeat they are not the people to be blamed for this fall.

I think the real issue here is that we, in some sense the enemy lies within, have chosen to react to every single negative news in the world and beyond maybe because we are the most literate community, self-confessed that we must react more.

So I personally think it is more a case of far more caution coming in and the same people, the same things that we talked about November-December-January the same players are talking about a completely different set of circumstances that is what mystifies me. I think at the end of the day as Rakesh (might want to say Rakesh Jhunjhunwala—he is only mentioning Rakesh) would put it, we all have a right to be wrong but I think we must follow our thought process to a certain level where unless facts prove you otherwise. Today the facts do not show me necessarily that if the epicenter of the problem is in the US that they should be down 6.5% for the year and a Carlyle collapse for instance in a particular fund is taken far more peacefully there than taken in the rest of the world. That I find truly unbelievable.

Q: I just want to get you in on the point about the Fed - there has been a fantastical rise in commodities and big Meet of that, at least for commodities like gold started with the Fed rate cuts, is it still a one to one correlation between a Fed rate cut and what might happen to emerging markets or do you think that mantel of leadership might have shifted, to another asset class for the next few months?

AP: I think the commodity price inflation is a combination of various things - one is the massive supply disruption in South Africa, China, which is one trigger, then geopolitical risk because of oil, then it’s a counter part of collapsing dollar and also the fact there is a strong view that we are entering, which I think is a bearish scenario; that we are entering into a stagflationary environment.

Stagflationary environment, is an environment where commodities or real assets do incredibly well and financial assets get clobbered. So there is a view developing that we are entering in a stagflationary environment and there was no choice; that the Fed, because it has no choice, is having to attack the economic growth problem in US and is letting caution go to the wind on the inflation front. There are some initial signs that inflation expectations in US are developing. But given that you are getting into a significant recession in the US, I believe that this stagflationary environment can be avoided. But commodity is a reflection of both weak dollar, supply disruptions.

The fact that the two largest emerging markets in terms of consumption - India and China have not passed the price increases to the consumers’ end in the economy because of particular compulsions and also counter weight against a developing fear in the stagflationary environment - those are the reasons why you see commodities have a huge run.

Commodity looks a little over extended; I could be totally wrong, I’m not a commodity expert. But if the whole world is slowing down and the reason why markets have dropped in India and China, is because you expect global slowdown and this seems a little odd that commodities are breaking out to all time new highs, despite the dollar and the other issues. But commodity is linked to various issues. It’s not just the Fed that’s the stagflationary environment - but it is the weak dollar as well as the supply disruptions on macro basis for commodities.

Disclosures: It is safe to assume that my clients & I may have an interest in the stocks/sectors discussed.

Source: Moneycontrol.com