Midcaps to correct 15% from current levels: Kotak Sec

Q: What are the signals you are getting from the Portfolio Management Services (PMS) and from the mutual fund fraternity? Are there anticipations or fears of redemptions from there or not quite yet?

 A: If you look at the net inflow in mutual funds, definitely month after month it has started coming down. They have been negative but further the fresh collections have definitely come down. Last month was in the region of more than Rs 1,000 crore.

Most of our PMS are close-ended PMS. So to that extent, obviously the redemption pressures are low for us. Having said that, are we able to collect fresh money and the answer is that - no. Definitely there is diffidence whether it is PMS or mutual funds; the retail and the High Net Worth Individuals (HNI) are saying no and they are happier taking safer instruments today. 

Q: Just as the markets started to get more narrow towards the all time highs we had, do you expect that to play out on the way down as well because up until now the selling has been quite indiscriminate and much larger and harder for the broader market? 

A: I would say that to a great extent, it depends on how the FIIs behave; obviously they have been selling relentlessly and the amount they have been selling everyday is in the range of around Rs 500-1000 crore. This can continue for next month or so, which can definitely then pull the market down because you are in a situation where the buyer seems to be completely away from the market and the shorts are having a great time. When the long-only hauls start selling, the market can go to levels which may not justify but like it went up based on liquidity, the market on the downside can also come down to levels which are not be justified based on lack of liquidity unwind.  

Q: Are you finding shades of the 2000 bear market in the current market situation? 

A: We do debate and discuss that it looks like that, especially considering the fact that many of the stocks have lost 60%-70% from the peak that has happened post the technology boom. Except for the fact that this has happened in a shorter period of time. At that time, it was specific to a sector; I would differentiate here that it is across sectors and it is more macro, which is driving it rather than one-specific sector having overvalued and then getting corrected there. So yes it reminds you of that and will tend to believe that it is not the same and it does get okay fast. But looks like it can last longer especially considering the fact that inflation is high and oil pressure seems to be away from anywhere near acceptable mark of USD 110 per barrel and even if we have to correct little bit from here, I do not think it is going to give market a great relief.  

Q: Things have turned distinctly weak for developed markets as well and there seems consensus, now that earnings estimates will have to be scaled back for the rest of this year perhaps even for next year. Do you think that process is already underway for our market or might there be a lot more by way of an earnings scale back over the next few quarters? 

A: If you have to take estimate for the current year though, most of the broking houses have not revised their estimates. It’s a clear writing on the wall that they will have to scale down the estimates; we will not achieve the Rs 950-1,000 Earnings Per Share (EPS) that you are talking about. How much down is a question and maybe I would not be surprised if the general consensus gears down to about Rs 850-900 range in the next one or two months. I am certain that we need to revise our estimates down.     

Q: Do you think we have seen most of the climactic part of the fall, the complete capitulation which signals some kind of a bottom or would you expect to see more of a climactic capitulation or panic before this market even forms an intermediate bottom or base? 

A: After seeing last 48 hours when we have seen stocks like IDFC and others falling 8-10% on a day, you are not sure. It’s possible that the market may in the next 15 days, show numbers bottom, which you have not seen in the past and from there, may be take it on. Where it’s a buyers strike, nobody wants to look at buying any stock; all those who have been brave enough to do that in the region of about 14,000-16,000 are wondering why they did that.  

Q: What are you telling your clients in the brokerage to accumulate or just to step aside and not be brave and catch the falling knife? 

A: There are two parts, one is that we are clearly telling them not to gear and take portfolios now. Second is it is very difficult to make a call of what is the bottom and the market can actually turn around very fast, things were to change for the better and they normally do not catch up when it turns around fast.  

So the best thing to do as of now is if your allocation equity has come down over a period of time, maybe it is time to slightly start buying into that, especially largecaps because that is the ideal way to enter the market.  But definitely not being aggressive and put major part of the portfolio in because it is possible that this sort of thing of market languishing or sliding down can continue for a long period of time especially because of the fact that they are more arising out of macro numbers than out of the micro numbers of the companies.

Q: Even to pay for a technical bounceback what do you think the trigger might be in order to get that to happen? 

A: The market always comes out with surprises. You do not know what because nobody expected that oil would reach USD 140 per barrel will happen and hence the market gets killed. So market always behaves and comes out with surprises that we have never seen. So I think if you look at the overall market, there is complete lack of faith. The first indication is that when everybody moves out of the market, market suddenly turns around and there are obviously a lot of shorts and one small sign or little bit of positive news, it tends to cover itself up which makes the market move on a short-term or a technical bounce back.  

These are factors that can give you short-term ups but to take a long-term or a medium-term view, we need to really focus on definitely two-three factors, which we all keep talking about these oil prices and inflation. If that is any sign or ability to control that, one can say that he believes to be in the market and ride that for some time. Otherwise it is more of a trader’s market where you tend to do in and out on a continuous basis.