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Narayan Ramachandran of Morgan Stanley Investment Managers said sentiment remains poor. "Many investors are waiting on the sidelines but are looking to put money from a long-term perspective."

He said most Asian markets have re-tested their January lows and have recovered.

According to Narayan, investors are likely to see more mark-to-market losses in many industries. "Qualitatively, we have shifted from credit crunch woes to earnings downgrades. The situation is mending its way and is likely to end around April this year."

He feels that everybody wants to time the market despite continued volatility. "Most investors were surprised when the market re-tested January lows. The markets have seen some irrational despair and may see better times from now."

Excerpts from the exclusive interview with Narayan Ramachandran:

Q: How much would you read into today's pullback and what's your near term outlook now?

A: We ended up the day more or less flat but there was a lot in what happened today. More important than just numbers, is the fact that there is pretty much across the globe whether one looks at China, other Asian markets or India. Today was important because we retested the intraday lows that were achieved on January 22 and at least this test was passed and in so doing we recovered from 15,400 on the Sensex back to where we ended up for the day. So the retest so far has been successful. It almost happened classically in sense that usually the retest takes place between four and eight weeks from when the first low had been made and this one comes almost exactly six-weeks after when we started this particular bear phase in January 22.

Q: What's your reading of the global situation and bad jobs data but there is some talk going around in the market of possible movement by the Fed and the Fed did do something on Friday? How do you read the near term global equation?

A: We have qualitatively shifted from the credit crunch related issues of late last year and early this year, into the markets themselves causing earnings downgrades because of mark-to-market losses and with the amount of mark-to-market losses on CDS portfolios, there are mark-to-market losses on hedging portfolios like we saw today and so on.

So these are now mark-to-market and you will see some more on the commercial real estate side in the US. You will see some mark-to-market losses on the private equity side in the US. I think we shifted into the second stage of this sort of bear phase.

We are somewhere between the second and third stage. The first stage of there being a severe psychosis and very difficult credit situation, while not completely gone, is partially appeased. The global situation is sort of mending its way out of the difficulty the really started in August of last year and will probably end in real terms and not in financial market terms but in real terms by say March or April of this year.

Q: What do you make of first ICICI Bank and now L&T? Do you expect more skeletons to come out of the closet over the next few weeks in India, not so much in the US?

A: I don’t think these are skeletons cut from the same cloth. These are fundamentally different. These kinds of announcements are mark-to-market losses related to the fact that the markets themselves are gone down. On balance sheets these days, most financial companies have instruments that have to be marked-to-market, be it private equity positions, residual secondary market positions, some real estate positions, and some credit related CDS kind of positions, etc.

What we are right in the midst of is sort of descriptive, almost of the fact that markets have gone down and CDS spreads have blown out. So, that is not new information per se to me that these are being announced. What people need to do is try to figure out where these exist and to what extent markets don’t know them? They will be a surprise but the category of marking down the market doesn’t surprise me very much at all. Now all of these markdowns will be marked up if the markets goes up next quarter.

We have to be cognizant of that particular feature that these are not sort of booked and lost forever. These are booked, pending further moves in the market. If those markets are up, they will be marked up.

Q: The big problem has been that of sentiment in our market. You are on the verge of closing your NFO after a long time, the second NFO at Morgan Stanley. What’s the sense you get of sentiment and how long it might take to build again?

A: Sentiment is decidedly mixed. There are those who have been affected rather seriously by the events of last month-and-a-half or so and they prefer to watch on the sidelines. But there are others who through their own experience or having done this thing in the past, sort of realize that precisely at the moment when IPOs get difficult, when money raising for NFOs is not as easy as it was etc, is precisely the time to invest. So, we are really getting two types of investors in the fund, one who would sort of prefer to watch and wait. But others who want to use the opportunity because they believe in the longer-term story and it is always better to buy after a correction than before.

Q: Are you a bit surprised, that mutual funds as a fraternity have not deployed more cash than earlier in this market because many people keep talking about the virtues of SIP, so the money keeps coming in regularly but mutual fund managers seem to want to time the market?

A: As professionals, maybe mutual fund managers can at least try. But what I find more surprising is the market at large, almost every one listening seem to be wanting to time the market. That to me is the unusual phenomenon. Professionals seeking to trade at a margin, where maybe they are already 80% invested and are thinking about how to deploy the last 10-15%, seems okay. So far that has been correct, though I suspect that today is an important psychological point where it’s quite possible that we have re-tested the lows.

I hadn’t anticipated that we would get down to 15,400 again because that was sort of a bit of an unusual low given that it was a holiday in the US. I had thought that when we got down to the low 16,000s, or high 15,000s that itself was a retest, but markets went down to almost precisely the level they hit intraday on January 22.

So, mutual funds will slowly make their way in. I don’t think we have huge down legs. We have gone through just a tad-bit of irrational despair, and it is at least time for neutrality if not actually seeking very good investments going forward from here.

Source: Moneycontrol.com