India: Monday outlook

Black Friday October 24, 2008 Closing level:

Sensex 8,701 (1,071) or (11.0%)
Nifty    2,584    (359) or (12.2%)
FII      (1431 cr)

We sold off so sharply on Friday that there could be upside pressure Monday morning. I will not be tempted even though my buy-in levels have been reached.

My attention will be riveted on the emerging market currencies and the commodities currencies; Hungary, Czech, Korea, Australia, Canada. A further run on these currencies will highlight continued flight of capital and that global recession is increasingly probable.

Every country is cutting growth projections including India and China; combined with the flight of capital future growth prospects are dimming in many countries. Global Banks with significant sovereign risk exposure to emerging market countries in Eastern Europe and Asia will come under more pressure.

In India, I continue to look for a liquidity event; companies borrowed heavily in foreign markets through FCCB (foreign currency convertible bonds). The conversions will not occur given the stock prices these days; of course, it is unlikely that these bonds will be rolled-over. At current $/Re exchange rate, and worse to come, there will be substantial foreign exchange losses and of course a liquidity squeeze in India. This is another sector, besides realty, which is at real risk.

It seems risk is continuing to rise. I will watch the pre-holiday market action from the sidelines.