Singapore-based head of investment strategy for Asia at HSBC Private Bank Arjuna Mahendran, expects the Asian markets, including India, to decline further in August. In an interview with Mehul Shah, he says hedge fund redemptions and margin calls on leveraged investors will trigger further selling. Edited excerpts:
Most Asian markets have corrected between 2-4 per cent on Monday after S&P’s downgraded US AAA credit rating. Do you think global investors have priced in the event after today’s correction or there is still some more pain left for Asian markets, including India?
There is probably some more downside till we test key support levels on the major indices: 1,150 for the S&P 500 in the US and 4,777 on the Nifty in case of India. Hedge fund redemptions and margin calls on leveraged investors will create more ‘sell into strength’ sentiment for the rest of August. Besides, the unfinished policies in Europe – giving the European Financial Stability Facility (EFSF) more capital to buy bonds in the secondary market and achieving greater fiscal cohesion – will keep markets wary about the danger facing European banks with sizable euro-area bond portfolio exposure, both direct and indirect.
How are you viewing the Indian market after the recent sell-off? Do you think India is better placed compared to other export-focused Asian countries?
India has traditionally been a defensive market during financial crises because of a large domestic economy. However, as its linkages to the US and European economies have grown, the correlation with their stock markets has also grown. It entered the current downswing in markets with analysts especially pessimistic about the earnings outlook for most Indian companies, when compared with their peers across Asia. Also, in our view, the Reserve Bank of India (RBI) has more tightening measures in store, relative to the rest of Asia. Hence, India will probably see falls as large as those experienced in other Asian markets this time round.
Is the fall in commodity prices, especially crude, going to help India, considering it may help in controlling inflation and the RBI may stall its rate hike spree?
Food inflation has been the major driver of Indian and emerging market inflation over the last year. Oil prices had a lesser impact since domestic prices of refined petroleum products are regulated. Hence, food supplies and the paucity of infrastructure, such as cold chains and surface transport, will prolong the return of food prices to the pre-2009 levels, if it happens at all. Hence, some elements of curbing speculative excess and demand destruction have necessarily got to play a part in curbing the upward trend in food inflation and preventing it spilling over into generalised wage inflation, which will prove insurmountable if left to fester for too long. Hence, the RBI may need to consider a further rate hike later this year in our view.
Do you expect a double-dip recession in the US and spread of euro zone debt crisis to continue weighing on investors’ sentiment?
Until the US gets its fiscal house in order by agreeing to some form of tax increases, markets will not be satisfied on the sustainability of the US debt build-up. The retiring baby-boomer generation will impose severe strains on the US healthcare system in the coming decade and this necessitates tax hikes to compensate for the anticipated higher expenditure. Till that is sorted, markets will remain downbeat. Poor cyclical momentum, on top of an already creaky structural foundation, leaves the US economy vulnerable to exogenous shocks. European debt contagion is the shock of the hour, which carries the threat of becoming the recessionary tipping point for the US as well as the global economy.