Large institutions eyeing non-US mkts now: Kotak Mah Bk

Paul Parambi of Kotak Mahindra Bank feels that large institutions and investors are looking at markets other than the US. Capital can come into India, if the corporates deliver numbers, he told CNBC-TV18. If there is a Bear Stearns-like situation with other investment banks, there could be serious problem, he said. His bank is allocating money into the market gradually, Parambi informed. The markets have seen decent inflows in January–March 2008, Parambi said.

Excerpts from CNBC-TV18's exclusive interview with Paul Parambi:

Q: What do you hear from global clients, are they petrified and can one expect any change in sentiment anytime soon?

A: If you are a global investor you are in a difficult position, particularly if you have to allocate capital. Traditionally most of them have allocated most of their capital in major markets like the US and right now that does not look like a good place to be.

Equity markets are going down the tube at this point of time. If you want absolute safety, you should look at government paper and that hardly yields anything. There the chord really becomes one of interest rates coming down and therefore you making appreciation on your yields. You could place money in commodities, but that has already gone up. So you are in a difficult position.

Now we are in a difficult but an interesting spot because in the last one month retail investors' sentiment has changed. They still believe India is a great story, but they are scared to put in money. So that is a change between February and March, but we are seeing a lot of institutions and large allocators really looking at markets other than the US and saying we need to allocate money and there are many of these dialogues going on. These are not investors who act overnight, but my sense is that India has to deliver on numbers. If it delivers on numbers I think there is a lot of capital waiting to come in.

If there is some bounce back, I think retail investors globally can come back in as well. So we are in a fairly good wicket as long as we are able to deliver our numbers. I think the rest of the world, barring the emerging markets, is probably looking pretty grim. So there is capital that can come in to help our markets in the longer-term.

However in the shorter-term, I am very concerned about what has happened with Bear Sterns, because that was one of the worst-case scenarios to be built in. We are very uniquely positioned among all markets globally, we are the only ones where these major investment banks have issued notes and where the exit option in terms of others picking up that exposure has been blocked out to a great extent.

So that poses a risk and that is one point the regulator needs to take care of and anticipate.

Q: To get back to that point you were making about Bear Sterns and their P-Notes position from the data that we have available, it seems that there were pretty clean transactions between Bear Sterns on one hand and another FII on the other. Is it your sense that this might get a little more complicated or it may not be such an easy transaction for a couple of other positions they hold?

A: If Bear Stearns has been taken over by JP Morgan, the situation could get taken care of. The real worry is if there is another bank, which again goes the Bear Sterns way and it is not bailed out, then what? That is a lot harder, because then you are forced to sell your positions on the market. Investors will sell out their P-Note positions and given current market liquidities, you will not be able to switch them easily. Because as you know, Sebi has really capped out the P-Note positions, which any investment bank can have and that can be potentially dangerous. Very often when you talk about Indian markets, one of the comfort zone it has had, is that you can get in quite easily, but you can't get out very easily. For instance, if you put out USD 5 billion tomorrow, it will again be a market to be buying rather than selling. But if you had a situation where you are forced to sell and you have no option, then you could really be in a dangerous situation. So in the Bear Sterns situation, you may not have as much of a problem, but if it was repeated with any other investment bank you could have a problem.

Q: What is the reality with hedge funds now, we keep hearing of how banks are tightening capital and therefore money is being withdrawn by hedge funds across the region including India. Is that a reality on the ground and how easy is it for funds to sell and withdraw capital right now in the illiquid market that we are in today?

A: If you are more into esoteric strategies into less liquid names, it is a much harder market to be in, because there is no liquidity to play in any size. Secondly, my sense is that it would be a lot harder to get leverage on your books and investment banks. So if you are a hedge fund playing an average book, then conditions are going to be much harder. Which is why a month ago, I clearly believed that some of these outflows are because of leverage tightening and some of the money flowing out from participation notes.

Q: It is a really tough call to take. But what is your sense of how long we are going to have this tight liquidity situation, because we have been speaking to a lot of emerging market fund managers who make the point that the strategy on a market like India now is sell on every rally you see?

A: I would not strictly agree with them. I think the market valuations are fine, but as Udayan was mentioning earlier, it can always get better. So while we have money, which we are sitting on as a fund house for international investors, we are allocating very gradually, but we are not selling at every rally and getting out of the market and that is really not the mood of our investors in our funds at this particular point of time.

Q: You have seen a net redemption of about USD 3 billion on just cash - not futures taken into account - by when do you sense the tide could turn or do you expect much larger redemptions over the next three-four months from global investors from India?

A: I am not very clear as to whether these global investors getting into cash or it is actual USD 3 billion of outflows from India. My suspicion is that there is a fair amount of cash sitting around and there definitely would be some amount of redemptions, particularly of leveraged positions and of really short-term investors, but my guess is there is a fair bit of cash around and there are net inflows coming. We ourselves have seen decent net inflows in January, in February and even in March. So this is the overall position currently. Having said that, the inflows are going to be much harder to come by and I think longer-term money will take a little while to come in, because due diligence processes on the country take longer.

Source : MoneyControl