WF : We’ve seen the Dubai issue rattle markets. We also heard of Vietnam having its own share of issues. How do you see this playing out and what could be the impact on India as a consequence?

Vetri : Dubai has come to the forefront as a major issue. But you’ve also had other incidents – Vietnam has its own share of problems and has devalued its currency, we’ve seen a huge spike in soverign credit costs for Greece in recent days. We’ve also started hearing murmurs over the last 2 days from Japan and Switzerland that they are uncomfortable about the appreciation in their currencies and that they might want to intervene to prevent their currencies from appreciating even more. While Dubai has hogged the limelight, there are many other elements that have been creating disquiet in the system.

As we’ve discussed earlier, global trends are very tightly correlated. What has worked in one direction can very well work in the other direction as well. I think we are getting a bit of that medicine right now.

As far as the specific impact on Indian companies and Indian GDP stemming out of the Dubai problem, its still a little early to assess. Some of the data points I’ve seen suggest that UAE as a whole accounts for about 14% of remittances into India – that could get impacted a bit. But overall, I don’t see anything that is likely to destabilise the India story.

But the more relevant factor is that risk appetite, which came back very strongly over the last 6 months, can go into reverse gear now – which can impact flows into our market.  India’s need for capital is still very large – that’s reflected in companies’ efforts to raise money through IPOs and QIPs as well as the Government’s efforts to raise money through divestments.

WF : Newsflow suggests that some infrastructure and construction companies like L&T, Nagarjuna etc have sizeable exposures to Dubai and can get impacted. How big is this issue?

Vetri : There are some companies that have not just construction related exposure but also asset ownership in that region. That can be a challenge.  However, we haven’t come across any company that has a material enough exposure to Dubai which can destabilise it.

WF : If risk aversion is likely to grow, do you see that impacting the dollar and therefore the dollar carry trade and therefore asset prices in emerging markets? Is today’s market reaction a kneejerk one or the beginning of a deeper correction?

Vetri : Its too early to take that call – but yes, there has been a lot of leverage that has been built into the system as a result of the dollar carry trade, where traders borrowed cheap dollars to finance asset purchases globally. So, there is a clear possibility that some of that carry trade can be unwound now, which will mean that traders will need to buy back dollars to repay their dollar borrowings.

But more than that, there has also been this dichotomy that has crept into global markets in recent weeks.  Equity markets have been interpreting positive economic news as positive for markets, but also interpreting negative economic news as positive for markets because that meant a weak dollar!

On the other hand, if you look at credit markets and treasury markets, they don’t seem to be showing any confidence in any economic recovery at all. Short term yields in the US went negative recently and two year yields there are collapsing.

This kind of divergence between markets often tends to indicate a reversal of trends. To therefore answer your question – can this be the start of a deeper correction – it can, but its too early to take a definitive call.

WF : How are you positioning your funds in this environment?

Vetri : From the time we spoke in September, we haven’t changed our stance very significantly.  We continue to be cautious on sectors that depend on global recovery and continue to be overweight on stocks and sectors that play the domestic consumption story. That story remains robust and if markets get choppy, we would rather be positioned in stocks and sectors that have earnings tailwinds coming from the domestic consumption theme.