Market Directions - Interview

ET Now talks to Saurabh Mukherjea, Head of Equities, Ambit Capital on the possible directions Indian markets may take, going ahead.

The intensity of selling that disturbed us and now is the strength of the rally which is mesmerising all of us...

Saurabh Mukherjea : I guess it is going to be a volatile year. One of the calls we made around Christmas time was that 2011 would be way more volatile than 2010. Now it was not that hard a call to make because 2010 was the least volatile year for Indian equities for a decade. So a reversion in volatility was on the cards and it is clearly is happening the rest of the year will also be very choppy. That being said, markets have further to correct.

There is a range of reasons partly linked to politics but partly linked to earnings and an economic growth scare which is on the cards, both the earnings correction, earnings estimate correction for FY12 and a growth scare for Q4 and H1 FY12 is on the cards. That will probably be the key catalyst that will push the Sensex towards 16000. So our advice to investors is that it is not yet time for bottom fishing . There is further to go before the market finds a bottom around 16000-16500.

Suffice to say that what we have seen in the past few days is a technical pullback rather than something which has fundamentally changed because inflation has sit at a high, you do not know what the budget outcome is going to be, fundamentally on ground nothing has really changed.
Saurabh Mukherjea : I think you have hit the nail on the head there. You can clearly see what is happening because valuations are coming off, people are looking for value buys. There is a great deal of logic and that clearly our country structurally is placed on a long term perspective. So for a long term investor who is not really worried about the next 3-4-5 months, this is a good time to buy. However if you want to call the bottom of the market and you want to buy right at the bottom, then my suggestion would be wait for 3-4 months. There are 3 reasons why I think patience is the best strategy at this juncture.

Firstly there is plenty more political news from Delhi from the CBI which will be unpalatable for the stock market. Some of them will be in Feb-March but all the way up to the end of the state election season in June, we will get a drip, drip, drip of bad news from Delhi. So that is the first negative driver. The second one is the last 4-5 months of political gridlock in Delhi has had an impact on industrial production and it will have a negative bearing on economic growth numbers. That will emerge over the next couple of months. That will have a negative affect on the market and finally EPS numbers for FY12 look unrealistic.

The Bloomberg consensus still is around 20-21%, that does not look sensible. 15-16% EPS growth for FY12 is much more likely. So as the EPS numbers start getting pullback over the course of March-April-May, the market will grind back. So 3 reasons, all 3 suggest that June-July is a better time to go bottom fishing.

Question : Purely on a percentage basis, what would be the allocation divide between large caps and midcaps that you would actually do ?
Saurabh Mukherjea: The bulk of the recovery rally whether it starts now or in June, the first area where big ticket investors will look at is large caps because the market has come off 15% since November. The preference would be on everyone’s part to focus on large cap, also large caps have moved protected from the inflationary forces. So at this juncture, I would have the bulk of my portfolio in large caps around 30% in midcaps and say 10-15% in small caps. Even in the first 6 months of the recovery, the recovery will be large cap led this time.

The inflationary dynamic means that small and midcap companies are really up against it in terms of input cost pressures, in terms of input cost pressures, in terms of rising finance costs. So small plus midcap would be a minority of my portfolio anytime between now and the next year or so.

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