Fund managers cringe after collateral damage
Increasing global concerns over tradable notes exchanged for mortgage-backed US home loans to subprime clients that have virtually become worthless have now begun to cause jitters even in an insulated market like India.
What is worrying Indian fund managers is that not-so-widely-traded collateralised debt obligations (CDOs) are held across the globe and could just take the market by surprise. The note is now worthless due to rising US rates, coupled with a falling real estate market there. ?Today, I heard even some European countries are being hit by defaults,?? said B Sambamurthy, Corporation Bank chairman & managing director.
Quoting a study, UR Bhat, managing director (India) of UK?s Dalton Capital Advisors, estimated that about 1.5 million home loan borrowers in the US, with an outstanding of $220 billion (25% of the subprime mortgage market), were likely to default over the next 18 months. ?One doesn?t know in which markets the risks are distributed and where they are resting. Every day, one hears of one big player defaulting,? said one banker.
Most experts felt there could be net capital outflows from India following the withdrawal of FIIs from emerging markets. These markets are now seen as risky and fund managers say capital could fly back to low-yield but safer treasury markets like the US. As a result, the BSE Sensex is expected to shed some of its flab and the rupee could depreciate further?a blessing in disguise for exporters.
?It took seven months and $7 billion in investments from FIIs and domestic institutions for the Sensex to gain 1,000 points at 15,000,?? said a senior research executive at an FII. ?In the immediate future, I expect the market to witness selling pressures and a 1,000-point downward correction in the near future,?? he added.
Since the beginning of this month, net FII outflows have been $600 million, against net inflows of $5.9 billion in July.
Deepak Parekh, chairman, Housing Development Finance Corporation Ltd, said inflows would definitely be hit and the country would witness net capital outflows. Parekh expects the spillover effect (of net capital outflows) to be more prominent from the third quarter onwards, when US banks start making additional provisions due to subprime home lending portfolios.
Domestic market experts now say that defaults are a boon for India, which saw an unprecedented appreciation of the rupee, an unreasonable Sensex level, ridiculous overnight rates of under 1% and a helpless central bank figuring out ways to encourage outflows or restrict inflows.
Overnight rates, however, rose to 6% and the rupee began to depreciate after a few monetary measures came into effect this month. But rupee appreciation remained a worry. ?(Subprime defaults) could ease the appreciating pressure on the rupee and one could see the currency depreciating further,?? Parekh said.
There will be other fallouts, too. ?In the near-term, one can expect a higher risk premia, as in credit spreads on corporate borrowings, on equity valuations and on property prices,?? said Gunit Chadha, managing director & CEO at Deutsche Bank, India.
According to Chadha, ?For India, it is collateral damage. Therefore, while there is likely to be near-term impact on inflows, if the secular growth of India Inc stays robustly intact, global capital will continue to be attracted to finance its strong growth plans.?