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The Pain's Not Over

There's A Lot Of Pain Left

Vetri Subramaniam, Head - Equity funds, Religare AEGON Asset Management, spoke to us at length on his views of the market. While he feels that the market has discounted the macro risks, the micro risks (which are company specific) could provide some rude shocks. Here is an excerpt from the interview.

In your opinion when do you see the market changing course?

It’s always hard to predict what will help the market pick up. If you read all the newspapers in January 2008, no one would have predicted what this year held in store. If you read all the popular press in 2003, neither would you find any indication of the market going to rally for the next few years.

I cannot really forecast where the market is heading or what factors will make it change course. But we have been in a slowdown for 18 months. In July 2006, the RBI hiked CRR to tame growth. This was the first signal that they were not comfortable with the level of growth they were seeing. Later they were clear that the economy is getting overheated, there were supply bottlenecks and they needed to slow things down. The market did not realise how dramatic the impact of inflation and tightening would be.
Now the RBI has changed course. It has been putting in some monetary stimulus to get the economy stabilised and is focussing on growth since the peak in inflation now appears to be behind us. It will take time for these measures to work and have an impact. 

But what makes it incredibly complex and difficult is that the global financial chaos is hurting us now. We are not operating in a vacuum.  

Do you think there will be more pain in the market? 

The macro risks are reasonably well known and well discounted into the price. And when you look at market valuations, with reference to historic troughs, we are somewhere near those levels.

But what has not been discounted is the fact that individual companies may not be able to weather the tough economic environment and come out of it. The market as a whole might have come down, but in the next two years as the economy and market consolidates, we could see some individual stocks come down a further 50%-80%. The coming years will tell us who is paddling without an oar and who has two oars to paddle with. 

Look back in 2000-01. When the market collapsed, all companies fell by around 50%-80%. Two years later, Infosys still existed, the business model was doing well, the business was doing reasonably okay and they were able to accelerate once the environment changed. But some of the other companies never ever bounced back. 
Even in the 1996-98 period, a lot of companies never made it out of that rut. So what I am saying is that what is discounted is the macro risk but not the micro - company specific -  risk.