India rallies 20% in 20 days: Are EMs back in favour?

The massive 20 percent rally seen in Indian indices in the last 20 days is because many investors are moving back to a very oversold asset class which is emerging markets and India is just part of that theme, says Udayan Mukherjee of CNBC-TV18.

"An asset class which nobody wanted to own has suddenly come back tactically into favour and that is why markets have rallied. The rest actually is noise," he added.

He reiterated that this rally was not a Raghuram Rajan rally and was global rally fanned by Ben Bernanke and it could extend a bit more.

"A lot of people might yet scramble to get into a trade having missed out. Some of the Exchange-Traded Funds (ETF) put in money to work, but a lot of people have not caught this trade. Therefore the latecomers might come and fan the flames a bit more and markets could go up a bit more, 3-4-5 percent quite easily from here," he elaborated.

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Below is the verbatim transcript of Udayan's analysis

Arguably one of the most important weeks in the history of financial markets has been behind us. The last 48 hours have been quite incredible. There is no easy answer to why we saw such a huge surge in the market and then a correction of 100 points the following day. Some big things are happening. After a long time there is a whiff of hope of emerging markets.

In the last five years, all emerging markets including India have been out of favour. Suddenly, in the last one month, that trade has come back into play and while one would hear a lot of noise around that event which is what the Reserve Bank of India (RBI) is doing, the kind of data which is coming in, they are all less relevant than what the Fed is doing and what is happening with global liquidity.

There are lots of important things which are driving the market at this point and it is important to understand that much of it is noise. The one thing which has led to this massive rally is what has happened globally in terms of people flocking back to a very, very oversold asset class which is emerging markets. India is just part of that theme and that is the reason why we have had a 20 percent rally over the last 20 days.

It is that astounding - 20 percent in 20 days. In dollar terms it is probably 30 percent over the last 20 days. That is just incredible. I do not remember last time any foreign investor or trader enjoyed a 30 percent rally in 20 days. This simply because an asset class which nobody wanted to own has suddenly come back tactically into favour and that is why markets have rallied. The rest actually is noise.

When the rally started playing out, a lot of people in India said it is the Raghuram Rajan rally, because he has come and yesterday that kind of theory might have got dented a little bit. So, I do not think this is a Raghuram Rajan rally at all. It is a global rally fanned by Ben Bernanke and if the music globally starts to play around for a bit longer, this rally could extend, though I think last night's price action in the US is a little disturbing.

Mother of all bear market rallies?

There is no easy answer to that. One is trying to map global liquidity and that is absolutely impossible. It is easier for investors to look at fundamentals and say fundamentals are good or bad at this point in time, because that does not change every week. What changes every week is global asset managers taking a call on what they want to do tactically with their money.

It is like bank stocks. For three-four-five weeks on the trot they get bashed up quite completely. Nobody wants to own them. Bank fundamentals have not changed in the last three weeks so dramatically, but these stocks have all gone up 30-40-50 percent. So, one needs to distinguish between what is the fundamental underpinning of many of these asset classes and what is happening tactically.

What was happening is everybody got super-bearish. All of this is hindsight of course. It is not that 20 days back one could see a 20 percent rally, but everybody got very bearish on emerging markets, maybe too bearish and that became an extremely crowded trade. So if you called up anybody and said what are you doing with your money, the answer would be I am in dollars. I am in the US market. I hate emerging markets. Everybody started singing the same tune and everybody hated bank stocks in India. When it becomes that concentrated markets will always give you a whiplash and that is exactly what has happened over the last few days, a spectacular mother of all bear market rallies I still think.

Could this rally extend?

Sure it could. I know it has gone up 20 percent, but the real money has started coming in only in the last five or seven sessions But some disturbing things are happening globally and into emerging markets. So, a lot of people might yet scramble to get into a trade having missed out. Some of the Exchange-Traded Funds (ETF) put in money to work, but a lot of people have not caught this trade. Therefore the latecomers might come and fan the flames a bit more and markets could go up a bit more, 3-4-5 percent quite easily from here.

Worst is the yet to come?

We can talk about that in detail, particularly this whole relief that everybody is talking about with Ben Bernanke having not moved, that can be a fairly dangerous move. Already last night I was hearing some people talking about the possibility of him moving in as early as October through a special media conference. If that happens, it takes away a lot of the feel good that is abounding in emerging markets today.

Also the bigger fear that I have is, say you have a fairly lethal cocktail brewing in the west which is that by the Fed's own admission US growth is not going to be as good as it was thought earlier to be. A slipping US growth where the mother of all bull markets have been playing out combined with a Fed which is trapped and does not know how to exit can lead to an explosion in global markets anytime.