Madhusudhan Kela of Reliance Capital explains to CNBC-TV18 that there is widespread consensus that 2013 will be a great year for the market and the economy on a culmination of various positive events and factors. However, he advises investors not to be overly gung-ho on equities and take a call after the announcement of the Budget begins to take effect.
Below is an edited transcript of the analysis on CNBC-TV18
Q: The market is knocking on the doors of 6,000. Is there a lot of upside in 2013?
A: The next two months till the announcement of the Budget, I expect the market will be broadly positive. The markets are up 30 percent on the back of only price-to-earnings (PE) multiple expansion virtually without any earning growth last year. The risk-reward is not as much in favour as it was six months ago.
The momentum is by the side and the market will not peak out in an environment like this where people are still cautious. So I would not be surprised if the market makes a new high before the Budget because there is culmination of - liquidity foreign flows, domestic investors wishing to participate and the roar of policymaking - before the Budget.
So I would not be surprised if the market hits a new high. But in this environment for long-term investors, who have been advocating equity. do not go to the other extreme and put everything you have in equity.
Q: So what's your prognosis- is the market going to move towards that new high after which it spends an extended period of time just trying to justify those levels and gain some kind of base or do you think its going to be an inverted-V kind of performance with all the good news in the first two months and then the market starts to come off?
A: It is too early to make a judgment. But I still feel that till the Budget there will be a culmination of a lot of positive factors. But after the Budget I would evaluate the impact of the Budget before I take a call.
Another favourable factor is that the global economic environment has been extremely calm in the last six-to-eight months. Investors seem to have forgotten the problems in Europe and America.
There is a widespread consensus among major domestic and foreign fund houses that 2013 is going to be extremely good. However, this does not mean investors can be overly bullish on the markets. The first quarter might be very positive but I don't rule out the market giving up 10-15 percent of its gains in the next quarter.
Q: There is another point of view which suggests that the first half will actually be difficult for global markets and the Indian market may struggle in that context. Do you see that as a likely outcome or do you think, with the way the market is shaping up, the market is going to touch that new high in the early part of the year and then go sideways?
A: The first quarter is when there will be maximum action in the markets. There is no doubt that the macro-economic environment will be better than what it was last year, but it remains to be seen, from a stock market point of view, how much of that has been priced in.
Q: What do you expect to see in terms of retail participation? Do you see retail participation coming in a big way once the market touches the 6000-6100 levels and will there be any kind of panic-buying this time?
A: I clearly see that coming. If retail participants wish to invest in equities, they have to be systematic and if they are already invested, there is no need to go whole-hog and invest all the funds at their disposal.
Retail investors need to be prepared for a dip because the longer-term Indian fundamentals are still intact. But after making 40-50 percent return, retail investors' expectations have to be muted.
Q: Dip of what magnitude? Will it be sub-5800 during the course of the first three-to-six months?
A: For the first six months, I would not rule out that. Again it is very difficult to pinpoint a level but if the market touches 6300-6400 before the Budget, the market can make a new high and go to 5500 by June, July or August. That is very much possible.
Q: How do you read the kind of flows we pulled last year because really thats been the most overwhelming factor for the market?
A: The FII inflows have been roughly USD 25 billion but a lot of it has not been reflected in the market. Close to Rs 65, 000 crore of these flows has gone to buy out long-term strategic stakes. Also for the whole of last year, the global environment was so bad that India was a destination by default.
So there should be little expectation of a repeat of inflows of this magnitude. I am also worried on the Rs 10-15,000 crore of redemption in the mutual fund and insurance in the last six months. So you see, domestic institutions are selling everyday.
The market's sole support rests on FII inflows and this poses great risk, It is not possible to rule out the adverse impact of reduced inflows on the market. In 2011, the market fell 20-25 percent on outflows of just USD 1 billion.
Q: You sound cautious. Is politics playing on your mind? Are you worried about the second half of the year and the impact of the elections on the run up for the market?
A: It is a combination of all the factors. The market is coming off from the 40-50 percent return in the last one year. Volatility across the world has collapsed in all asset classes and the VIX Index is at a multi-year low. An economic environment with volatility being so compressed cannot exist forever. I expect the markets to be far more volatile in 2013 and Im on a wait-and-watch mode if the markets after offering a return of 50 percent returns posts a downside in volatility.
Thirdly, all the gains in the last one year have come only on account of PE multiple expansion and a lot of it is yet to reflect on the real fundamentals. So all these factors are making me circumspect of going overboard and telling investors who have missed out on equities, that this is the time to be fully invested.
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