The Editors' Cut: Yen 'Carry Trade' & Market Sell-Off Decoded

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Monday mayhem in markets following end of 'carry trade'; #Nifty, #Sensex close lower.   Muralidhar Swaminathan, Sajeet Manghat, Niraj Shah, Tamanna Inamdar, and Vishwanath Nair discuss the market sell-off on this special 'Editors' Cut.' #NDTVProfitMarkets #NDTVProfitLive

Transcript

00:00bit on what has been a tough Monday, not just for Indian markets and investors, but across the world.

00:07I mean, several words being thrown out there, carnage, sell-off, bloodbath, all of that,

00:12we're going to break down with, of course, all our editors in this special edition. Let's start

00:18with the biggest question I think everyone's asking right now. Is this something which is

00:22going to get worse before it gets better? We know all of the reasons, global markets,

00:28concerns of what the Fed will do, Bank of Japan, yen carry trade, etc. More pain to come?

00:34So, I think, and Tamana, we spoke about this during one of the shows as well, right, that

00:39if there is interventions that come in from any of the finance ministries or the governments,

00:46notably Japan and US, then it's a separate case in point. But otherwise, falls like these don't

00:52last necessarily only for a day. They don't get bought into so quickly, because there is

00:57the fear of the unknown. Unlike an event that happens, which is, let's say, a weak budget,

01:04or a rate cut decision, or a rate hike decision, or so on, so forth, wherein the impact is largely

01:09known. Here, there is a mystery of the unknown, which may keep the smart buyer at bay,

01:15waiting for the tide to turn before she or he decides or the institution decides to invest.

01:20So, I fear that we may not have seen the end of it. And from the way European markets are trading

01:26at the point of time when we are talking about or the US futures are, I mean, unless things change,

01:30wherein some announcements are done by any central bank, Japan or US again,

01:35maybe there is still some pain to go. Right. You know, let me put it this way,

01:40to add to what you said. Let's look at some of the key indices that we are looking at.

01:45We all know that everything has run up phenomenally across the US and in India,

01:51and most markets. I'll first look at US Treasury bond yields. They are down to 3.7%, you know,

01:57which is what would happen if the Fed cuts the rate. So, when will Fed cut the rate? How much

02:05is a question the markets will watch. That's number one. Secondly, NASDAQ is down roughly

02:10about 5.7 to 6%, though individual stocks have crashed. But most of the constituents or stocks

02:17forming the NASDAQ have run up again, like they have skyrocketed. Nifty is down roughly since,

02:24if I take from 25,000, roughly, we are looking at some 4, 4.5%, other indices,

02:30more or less at the same level. Now, the only index that has fallen sharply is Nikkei,

02:37which is roughly about 19%, you know, including 12.5% today. So, if I leave Nikkei out,

02:44there is still a lot of more room for cuts. It might happen slowly. It might be a situation

02:50where we are getting into a correction kind of a market. You know, whether this is a price

02:55correction or time correction, we don't know, but this looks like a price correction.

02:59I think price correction is especially happening in sectors and stocks where we have seen a lot

03:05of run-up happening. So, you have the mid-cap, the small-cap index, which is the reality.

03:13From the Indian market point of view, I am talking from the Indian market point of view,

03:15and it has been taken as an opportunity to do that, and that correction is happening now across

03:20the board on those sectors, which is there. So, the classic thing is that, you know,

03:25you saw the Nifty, FMCG being the least falling today in that sense. It was, I think, one of the

03:32first only index, which was up in the morning, and then it fell by half a percent or so. So,

03:37this defensive play, which is coming into the market now, flight of capital going to those

03:43defensive sectors, and those sectors especially, which have run up a lot, who have done 100%

03:50returns in the last one year or so, we are seeing some kind of correction coming in mid-cap,

03:55small-cap and… You know, it is reminding me of 4th of June,

03:58where obviously, very, very different… We did not have a defensive play coming in here.

04:02Absolutely, you had a defensive play coming in. On 4th of June, right after the election results,

04:07when that gold carnage happened, pick up and see which were your top running stocks,

04:11it was all your FMCG stocks, and at that time, everyone was coming up on the channel and saying,

04:15acha, their time has finally started, the rotation has come, defensives, no matter what happens,

04:21people will buy toothpaste, soap, etc., it disappear in a day. I am not saying that is

04:25going to happen here, obviously, because that was a very different story.

04:28That is a flow, I think, which we will decide, which is where it is going to be.

04:31But I am saying the defensives get pulled up, and this whole story gets pulled up every time

04:36there are jitters, but then again, these are companies which are growing at very slow rates

04:41compared to the kind of alpha the Indian market is used to, and the stocks have not done much.

04:46They have sat out this last three-year bull run.

04:50Yeah, I do not know. Vishy, any thoughts?

04:54I just want to say, I am not getting into the way the market is performing at this point in time,

04:58but then everything is not short-term here. There is an element of slightly more long-term,

05:05slightly more under-the-radar issues that will flow out. So, the first of which is the fears

05:11of a US recession. Yes, a lot of experts that we spoke to today and even people who put out

05:17their notes are saying that there is a likelihood, but it is still low. We may see some slowdown,

05:22but recession sort of a risk is very low. I am not entirely sure if that is true.

05:30At this stage, it is pretty much anything could happen, right? So, one argument that

05:36people in the market are making is that the US has been slow or has sensed a delay in its rate

05:44cut. It has pushed it to September, and even that is a very recent sort of development.

05:51They are announcing that they will start, look at a first rate cut in September.

05:54The expectation was it would come much earlier in the year, and it did not. And that is why

06:00the fears that US might come in late into the game and that might push the US economy into

06:05a kind of a recession. What that will also push for is across the world, there will be ripple

06:12effects. You will see some impact here in India. You have companies who have gone out and taken

06:18these special trades with the yen as a backing currency, borrowing in yen and then converting

06:24it into dollar later. They have taken that because there was a big benefit on the interest

06:28costs that they were earning, right? Those things do not vanish overnight, even if the broader

06:34equity markets... But in terms of the number of companies who actually have that kind of an

06:38exposure from... So, you are saying two, three things. Let us just come to the Indian exposure

06:42first off, because that is a question that we are getting time and again, and we will take some

06:46viewer questions as well. Is India that vulnerable to the yen carry trade in relative terms?

06:53Let us not mix those two. There is not. But the currency market is vulnerable to any kind of

06:59movement. So, even if it is a handful of companies that face an issue with their repayments,

07:05that problem will show up in the markets. But the other point that I want to make is,

07:10a lot of the moves that we have seen today are not necessarily fundamental in nature. It is not

07:14because there is a yen impact which is fundamentally felt by Indian companies. When

07:20there is a risk off and when money flies out or if money doesn't come in, stocks will correct

07:26independent of whether fundamentally there is an impact or no per se. Because this is a sentiment

07:32that is turning. And I think when this sentiment turns in a market which is overvalued or in a set

07:37of markets which have run up quite a bit, there is no saying as to when it stops. Because we were

07:42expensive at 25,000. We are expensive at 24,000 if you want to make that argument. And we can

07:47make an argument that we are expensive at 20 to 500 as well. So, this need not be just fundamental

07:54in nature. Sure, after a point of time, after 5 days, you will cut down the tails and get down

08:00to the pockets and squares and figure out, okay, this sector actually gets more impacted because

08:04of the yen exposure otherwise. But right now, I don't think the market is making that distinction.

08:08So, there would be a change in the kind of earnings growth estimate which will be calculated

08:14over the next few days or weeks. Even if that doesn't happen, Sajeev?

08:17On the impact, not immediate, but on an entire financial basis, what could be the impact on that?

08:24But I want thoughts from all of you on this. Now, unless somebody has to make a point.

08:30Now, I have a question to him, but I will come later.

08:32The only point I wanted to make is that if there is a currency impact, it will show up in March,

08:36during the middle of the year. That's when the repayments kick in and that's when you will see

08:39most of the impact. So, where yen is at that point in time will matter.

08:42So, now, let's play the devil's advocate and try and think of what this does for the future,

08:49aside of the fact that we know sentiment is turned etc. There is a graphic that we have of how

08:54brokerages have shifted their narrative and argument around what could happen to rate cut

09:00cycle. So, Citi expects 125 basis points by the end of 2024, JPM 50 each in September and November,

09:07Bofa starting September. So, that's the first point. And two, the technical factors. For the

09:13longest time, we were hoping that oil prices should come off. They are decisively off 70 and 75

09:19currently. We've been hoping and praying that yields come off. Look at the US treasury yields,

09:24they have come off quite meaningfully. So, aside of the fund flow picture, the technical

09:31triggers which typically bring about an excitement in risk assets are there in play. So, when the

09:36dust settles, which at some point of time it will, do any of you believe that there is a chance that

09:43the recovery could be V-shaped because hitherto we have been used to seeing a V-shaped recovery

09:47in risk assets, equity markets. Can that happen or could this be prolonged is the question.

09:52I am going to stick my neck out and say yes, there will be a V-shaped recovery and it will

09:57be sooner than anticipated. And one of the reasons I am basing that on Neeraj's conversation we just

10:03had about half an hour ago that there is going to be a series of appearances that various Fed

10:10officials make through this week. And those comments that they make are going to be watched

10:16very very closely after the kind of carnage we have seen. Any kind of positive indications,

10:22any kind of dovish commentary will be seen as a positive. If it's a sentiment which is a problem,

10:27turning that sentiment or that sentiment might not take too much time to turn. We have seen

10:32that time and again, money waiting on the sides, nothing is fundamentally changing.

10:36India is not looking hurt in any way economically. I mean, I think you are going to see a recovery,

10:42you are going to see it fairly quickly. That's managing the sentiment which Kamal is talking

10:52about. But more than that, it would be more of a flow which is going to come in, foreign flows

10:57which are going to come in, which may slow down a bit. Because a lot of trade that goes into

11:02emerging markets are funded by local financing which actually is from Japanese banks which is

11:10there. But Sajid, that doesn't end. It doesn't end. So the impact at 22,000 or 23,000, the impact

11:16will be priced in. So what is the quantum of it? So now the risk is getting priced in. Earlier it

11:20was risk-free, now it's risk-priced basically which is there. So the people on the fringe

11:26which were taking this money will not be there. So you don't believe it will be a V-shaped recovery?

11:30It's not going to be a V-shaped recovery. I will agree with him. Will the inflows come in? Yes,

11:36it will come in. But will it be as big an inflow? I don't think it's going to be that.

11:41Okay. Now, two, three parts to this. One is that Fed is going to cut the rates for sure,

11:47whether it's September or October. It will be a little more aggressive. Or earlier. Or earlier

11:52also. I don't know. I mean, that's a speculation. I don't get there. They will pretend to do it

11:57earlier. So the line of thought here is that Fed will cut rate, RBI is unable to cut rate. Let me

12:04look at our own market, come back to our own market. Now, what's the biggest problem that

12:08we are going to see? Managing the retail investors' mood and sentiment, as you rightly said,

12:14that's going to be a tough ask. Because I'll give you four data points here. 1987, 1998, 2008,

12:232024. So between 2008 and 2024, I'll say 2010, when we came out of this, we haven't had a major

12:33except for the pandemic. Right. So now this one is a situation where asset bubble has built so much,

12:43you know. So the fundamental part will not come into play immediately, but you will slowly start

12:49feeling the pain. You will slowly start seeing earnings get into, cut into earnings. Fed might

12:55cut the rates, but here the cost of funds are not going down as yet. So that's where, you know,

12:59I have a question, how would RBI approach this? You know, so therefore, right now MPC meeting is

13:05on and day after tomorrow they are going to come out. So how will RBI look at it? This will be on

13:09top of their mind. Forget inflation data, forget growth and everything. I mean, this is a crisis

13:14in the past. Central bankers have managed in 87, 98 and even 2008. Now, this is a completely

13:22different kind of crisis that we are looking at, because at the two ends of the spectrum,

13:28you know, one end of the spectrum, you have rates going up and the currency going up. At the other

13:31end, rates are going to go down, but we are caught in between. But I'm not sure if India is a crisis

13:36though. It's not a crisis. I'm not saying it's a crisis. We'll get NGAL. Okay. That's the whole

13:41problem. Therefore, V-shaped recovery would take a longer time. There was a question on the asset

13:46bubble even about two months ago, you know, when the last monetary policy announcement took place,

13:52this question was posed to the RBI and their firm view is that they're not seeing a bubble.

13:57Yes, there are concerns in pockets, but those concerns, there are always going to be concerns.

14:02You know, you don't have a perfect system. You're always going to have pockets where the

14:06situation is not ideal. Having said that, the RBI has a lot of confidence in the way that the Indian

14:12financial markets, broader financial markets are performing and that they believe that they are

14:18at the right track. So, if they are going to hold the rates and they've been holding the rates for

14:22now, what, 10 policies, announcements now. So, they are very sure, assured on themselves that

14:30this is the right place to be and they want to stay put. Now, whether the Fed's decision to cut

14:35rate in September and therefore, the RBI, you know, when they meet in October, will they be

14:40forced to cut it then? All of these questions are maybe if possible. Everyone's pencilling in April

14:45for India. Yeah. So, 2025. That's what, six months after the Fed starts cutting. Everyone's,

14:50I mean, no one is pencilling in a 2024 calendar. 100%. It's not likely. At all. What changes,

14:57why should Shaktikanta Das today, Governor Das, look to all of this and say, oh, let me do

15:01something about it. There is nothing that is pushing that. I mean, he is the only central

15:03banker who hasn't, you know, bothered everyone unless, unlike Bank of Japan and Fed. And there

15:07is a reason, there is a reason why Shaktikanta Das over the last two policies has been making

15:12an effort to specifically say, we are not worried about what the US Fed is doing. We are our own

15:17central bank. But the RBI, no, no, not as of today. Cut to change the sentiment is the question.

15:21Does the RBI really need to cut to change the sentiment? They don't. They need to just change

15:25their stance. But central banks don't cut for sentiment sake. At times they do. 2020 was an

15:30example, right? May of 2022, when they started the rate hike cycle, that was specifically was

15:37a sentimental rate hike. It was not like nothing had changed in the domestic economy. The expectation

15:42was that this war is not going to end anytime soon and therefore, things will start showing

15:45up badly on the inflation side. We need to at least signal to the market that we are ready to

15:48act. After that, they have continuously hiked. That's a different story. But when it happened

15:53as of May of 2022, it was only sentimental. Yeah. You know, so my last quick 30-40 seconds,

16:00and typically institutions when they buy these days, and, you know, now we know that institutions

16:07follow a mix of fundamentals and charts. So people who are going long, go long and don't

16:12necessarily cut their positions because stocks have reached a particular level. They wait for

16:17the tide to turn. And even if they can't time the top, because nobody can, right? They keep

16:22a trailing stop, if you will, up to a particular level that it slides down to. I think that's what

16:27large short sellers do in times like these, that they are short. They will not extinguish their

16:32shorts just because the levels have been reached so swiftly. So I think what could happen is that

16:38shorts will stay in the system. They will let it ride until the tide turns. So instead of trying

16:44to, so it could well be a V-shaped recovery, right? Tamannaah is saying there will be one.

16:47Sajith is saying there won't be. Who knows? You're saying a softer U, maybe?

16:51No, I'm saying, I don't know. But my limited point is what institutions, institutional people

16:57who are shorting right now would do is wait for the tide to turn before they cut. So there is no

17:02need for a retail investor who is watching us right now to be a braveheart and buy just because

17:07the market has fallen 1000 points. Wait for a bit, bide your time, bide 5% higher. It's okay.

17:12Absolutely. Yeah, absolutely. You know, so there is no need, nobody should just rush into it. I

17:17think that's a question everybody is asking us on YouTube and other social media. What should we do

17:23now? Be calm, don't sell, just stay on the sidelines and don't buy till you get a clarity.

17:29See, buying should be there only when there is clarity. You had euphoria and now you have a

17:37completely different situation. So should not be caught between the two.

17:41Absolutely. So a lot to unpack. Remember, this is just a slice of all of the analysis that we're

17:47doing on NDTV Profit. You can go to our website, our social media handles, and you'll see a whole

17:52host of views over there. But we just wanted to give you an amalgamation of all the conversations

17:56we've been having since early this morning. And as this unfolds, the pain is definitely not going

18:02away in the next 24 to 48 hours. So let's make that very clear. And if you need to be on top of

18:08all of the events unfolding, you know where to come. But for now,

18:12thank you so much for joining us on this very special edition of Editor's Cut.

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