Thursday, June 01, 2006

>India: The End of Unbridled Optimism

India: The End of Unbridled Optimism

Tinkering dumb politicians, Red Flags, Dirty Commies, Oil prices, Inflation, Currency and Current Account Deficits, India has got all of the negatives. It also has $ 45 bn of portfolio flows which may want to leave the country.

All those who had carved out a belief in Equities over the past three years would have realised by now, that it took a mere 15 trading sessions of blitzkrieg, to send them back to the starting blocks. The worst part is that FII selling of a mere $ 2 bn has pulled the broad index down by 28 percent from the peak. With close to $ 45 bn of FII money invested in India, and by some estimates nearly half of this money being Hot Money that came in the last two years, ready to leave the country, there simply are no buyers to allow a smooth exit. While analysts talk of a firm base of 7000 for the Sensex, another 3000 point fall in the next few weeks will make Hedge Funds and FIIs increasingly desperate to exit. Yet they will find that all EXIT doors have been left closed.

For hedge funds, May has been a miserable month that may mark the end of earning easy money and the beginning of tough trading conditions for fund managers, investors and industry analysts. Nothing has gone smoothly in the $1.2 trillion hedge fund industry since a sell-off in precious metals prices spilled onto emerging markets and soon affected developed markets. In the absence of a real catalyst, analysts blame fears of inflation and rising rates for the sudden drop. Many of the world's roughly 8,000 funds lost between 3 and 6 percent in the first three weeks of May with some having seen swings of 10 percent or more. People have given back a lot of the profits they made in the January to April 2006 period and the rest of the year will be much more difficult to trade, with people becoming more sensitive to risk and making fewer bold moves.

Now hedge fund managers, who earned strong returns by simply being long on equities, will have to make savvier stock picks, and any bets on commodities may have to be a little bit quicker with more moves in and out. That may be a shock for the legions of managers who earned more money in the first four months of 2006 than all of 2005 simply by jumping on trends that were too good to pass up.

Several hedge fund managers, many in the lightly regulated industry held onto metals bets far longer than they should have and may now face the consequences as this month's heavy losses could trigger another round of industry closings. The weaker players could get knocked out and that would be a good thing. In the past days of turbulence, copper was the worst hit of the metals after prices had previously doubled this year amid expected demand to fuel foreign building booms and as pension funds piled in. Hedge funds that had no plans of reinventing themselves as commodity traders were suddenly betting along managed futures players and commodity trading advisers, who use computer models to plot the course, and thought metals would keep rising.

Some players still look for more gains ahead and remain long-but the Bulls are in minority. Losses havent been confined to metals however and that's what is making the month so treacherous, investors said. Global macro funds that bet on currencies, commodities and interest rates are said to have given up roughly 25 percent. Funds specializing in emerging markets and even mid-cap stocks were said to have given back as much as 50 percent.
"Meltdown May" is now a catch-phrase with weary traders and managers, who recall last year's turbulence in the convertible arbitrage market, but say this year's troubles are far worse. In 2005, it was contained to one trading strategy. In 2006, it is much more broadly based. If you were out there, you probably got hit.

Does the current lot of investors have any experience of the Year 2000-01?
The current troubles remind some people of the early days of 2000 when legendary investor George Soros restructured his empire after heavy losses on technology stocks and Julian Robertson, an equally famous manager, closed after having stuck to his value investing roots during the technology boom. But investors are also quick to point out that this month's losses don't measure up to previous crises, perhaps because people did so well earlier in the year. It isn't the wholesale slaughter we saw at other times. Even though some people may have lost 20 percent, it may be hard to feel too sorry for them if they are still up 30 percent. That’s pretty simplistic in my view. Unlike the Bull, which is a non-carnivorous animal, slow, doddy and stupid, the Bear is a ferocious carnivorous animal that rises to mate and eat for a few months in a year. What have we have seen now may just be the trailer of marauding villagers slaughtering a Bull in the Marlon Brando movie "Apocalypse Now". Equity investors are reminded to watch this movie over the weekend, just to get a feel of what a slaughter is.

Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations, outlook etc are included in this update to help investors / analysts get a better comprehension of the Company's prospects and make informed investment decisions. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Investers are advised to consult their certified financial advisors before making any investments to meet their financial goals.

Rajiv Handa
011-91-11-2712 9653
the Post reflects the view of Rajiv Handa and not the author of this log.

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