Monday's market crash has left most market participants gasping for breath: the decimation, particularly in small and midcaps caught most experts off-guard. Most, but not all. On 18th July 2015, at the CIO Panel at our last Wealth Forum conference, Ritesh Jain stood out among the galaxy of experts with a clear call to expect a severe and sharp correction within the next 6 months. His words have come true within just a month. We asked Ritesh to share with us how he sees equity and bond markets going forward. Ritesh believes there could well be one more round of market volatility within the next 3 months, before the dust can settle and India's long term equity story gets noticed once again. His outlook for fixed income markets is however a lot more positive even from a near term perspective. Read on to understand why Ritesh expects more pain ahead for equity markets in the near term.

WF: In our CIO panel discussion at the 6th annual Wealth Forum Platinum Circle Advisors Conference on July 18th 2015, you were the sole panellist who expressed a view that there is too much complacency globally over Central Bankers ability to keep markets afloat, and that we must prepare for a sharp and severe correction within the next 6 months. Events unfolding now are proving you to be spot on! What next for global markets? How do you see markets heading in the near term and how much more pain are we likely to see in Indian currency and equity markets?

Ritesh: We are seeing first sign of stress and fear in markets with US vix up 45% on Friday alone and Indian VIX also up by similar percentage. I think markets are oversold and due for a bounce in near term as central banks will try to calm the markets by hinting at either a delay in US fed rate hike or china announcing a stimulus. Beyond short term I believe we will see one more bout of volatility over next 3 months where I expect one more equity correction and US 10 year yield to drop sharply towards 1.5% from 2% currently. Indian markets have also reacted to this global sell off and I expect we will see more volatility in both currency and equity markets before this global correction is over. But I do expect that Indian markets will outperform EM by falling less in this correction and when recovery starts Indian markets will bounce back faster.

WF: How do you see the end game for this turmoil? Are we likely to see a deflationary spiral degenerate into a global depression or will there be another rescue act that can successfully kick the can down the road for some more years?

Ritesh: I think this can will be kicked down the road only for countries which do not have a current account deficit and/or do not depend on commodities exports, because we are in a powerful dollar bull market which will lead to severe deflation in these countries. India is very fortunate to fall in neither of these categories.

WF: Global bond markets are said to be another big source of worry, especially since EM currencies have turned weak - making EM debt unattractive, and given that US interest rate hikes are only a matter of time. How do you see global bond markets in the months ahead?

Ritesh: I believe confidence in central bankers is only dented in this correction so the bond bull market will be alive till this confidence stays. We will see lower yield in developed world in next three months accompanied by high volatility in equity and currency markets. So the developed world bond yields will be much lower in coming months but EM which either have current account deficits and foreigners hold very high outstanding issuances ( eg Malaysia, Indonesia) will see rising bond yields .

WF: Will our debt market too get caught in the ongoing global turmoil or is that space relatively immune to what's happening around us?

Ritesh: I think our bond markets will be quite immune to what is happening in rest of the world because foreigners hold less than 2% of outstanding govt securities, compare that with Indonesia or Malaysia where these holdings are as high as 30%. We also have monetary space which other EM don't have.

WF: What medium term implications can this turmoil cause to our economy and our markets?

Ritesh: I see three pronged implications for our markets

1. Capital flows to India stalling till the global markets see signs of stability. We will have to wait for fed rate hike to be priced in for that

2. The obvious vulnerable spots are commodity owners (and specifically metals) with bloated balance sheets and especially those with foreign debt. Lenders with bulge exposure to weak balance sheets will come under stress (think Public sector banks and stressed privates).

3. Equity markets are at more risk than fixed income markets because foreign ownership is quite high for Indian equities as compared to Bonds ( less than 2% of outstanding issuances)

WF: Looking bottom up at Indian stocks and sectors, what is changing at the margin - positive and negative - from the ongoing commodity, currency and stock market upheavals?

Ritesh: We have not changed our stance on markets. Good quality companies delivering growth, having less leverage and with net dollar revenues will continue to do well. Among sectors we like auto and auto ancillaries, private sector banks, pharma, cement and cap goods.

WF: Looking at our bond market's fundamentals, how do you see inflation and interest rates heading over the rest of this fiscal? What, if any, is changing in these fundamentals as a consequence of recent global events?

Ritesh: I think the most fundamental change should be postponement of fed rate hike to at least Dec which can be seen as dollar has already started falling against major currencies. I believe RBI will be on course to cut rates in Sep. Both these likely events keep us firmly in bond bullish camp. Before this global correction we were of the view that yield curve will flatten but now we believe yield curve will steepen. I also believe that is time to stay with highest rated corporate papers and not look for extra yields by going down the curve.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

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