Expect to see profit booking in large caps: Morgan Stanley

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Gaurav Doshi of Morgan Stanley Private Wealth Management tells CNBC-TV18 that there is a likelihood of equity markets flattening out in the near term. "We think the market will move sideways from here on," he said.

He expects to see some profit booking in large caps post expiry, especially by foreign investors, and Doshi thinks will add to the consolidation. "A factor that is making me more nervous than others is crude trading above USD 120 per barrel. It potentially could delay the RBI rate cuts that everyone is looking forward to," he said.

Below is an edited transcript of his interview. Also watch the accompanying video.

Q: It has been surprising with the quantum of the gains we have seen on the market especially on the broader market. How are you calling it for the near term, you see more headroom it may flatten out?

A: I think that in the near-term there is likelihood of it flattening out. Last time when I was here, I had said that the only difference we have this time is that post this risk on trade we do not expect a risk off move. We think the market will move sideways, consolidate, the large caps will correct, and midcaps will play catch up, narrow the gap, and participate. The one that haven't participated is because of three factors; one is that you had index large cap stocks deliver return of almost 30-40% so post expiry there could be some profit booking trades that could emerge over there.

Second, the liquidity that has been the primary driving force behind our market, the overseas liquidity that we are getting is a function of money that is moving into emerging market ETFs. We had Jonathan Garner last week book some profit and raise some cash on his emerging market call. He had gone long on emerging markets in the end of December that trade work perfectly. The emerging market ETFs have had good run so he is taking some money home so even on one level the fund flows that we have been seeing could dry up or wait for probably selective better entry opportunity.

Last of all, one factor that is making me a little bit more nervous than everything else is crude. We have been turning a blind eye but the fact is that USD 120 per bbl. It potentially could delay this whole view that we have about the RBI cutting rates, inflation trending lower if this crude comes in place point spot. So the market didn't have a valid enough reason to correct but with these two-three factors put together post expiry the market could find a reason to consolidate and cool down a bit.
 
Q: What about the global cues that we have lined up be it the Greek deal reaching fruition or even the second round of ECB's LTRO. How much do you think it could stimulate the market on the way upside? Alternatively, is it already baked into the price?

A: These factors have been driving this market up. It is the central banks across the world easing. With LTRO there is further liquidity that's coming into the system and the whole trade is been that when the tap is on all both rise, so you will see this excess liquidity getting flushed around into the risk on assets. That is why emerging markets are making the move that they have.

I do believe the market is already pricing in the ample liquidity and the potential muddling of Greece. I do not think the market today is factoring in a Greece default. It is taking longer than usual but the fact is the market is more constructive on Greece, on the outcome of Greece than negative. Therefore, the only cheviot here for India is that in any case you have a situation where central banks globally are loosening and filling the markets with money. There is already a potential of inflation increasing in emerging markets like India, Indonesia and Malaysia. Now with crude going up because of Geo-political reasons, it can further increase the regional inflation risk and that may not be a good sign. While globally it may look good, liquidities are abundant, Greece muddles through; it may not actually be the best recipe for emerging markets like India.