Morgan Stanley fears rally may lose steam at 5300-5400

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets

The new year has been pretty good for Indian market bringing in Rs 10,000 crore foreign investors' money in just four weeks. The Nify gained 12.5% while the Sensex jumped 11.5% in these four weeks. However, experts are worried about a correction now.

Gaurav Doshi, Morgan Stanley Private Wealth Management is concerned that the market is likely to lose steam at around 5300-5400. In an interview to CNBC-TV18, he said that the market may consolidate post the risk-on rally and sees 4800-4850 as support.

Doshi also warned that asset quality continues to be a concern for PSU banks but thinks that worst is behind us in terms of earnings downgrades.

As an investment strategy, he advises to book profit in FMCG and pharma stocks.

Below is an edited transcript. Watch the accompanying video for more.

Q: From 4,500 we have reached 5,200. How much more do you reckon in this rally?

A: There could be little more steam left but not too much. We are over the 75% mark of this risk on rally that we are seeing. The momentum will stay but once the momentum dies, fundamentals will take over. A lot of stocks to me have run up a little bit ahead of their fundamentals so there is potential for some sort of a pullback.

Earlier in January I was talking of 5,000-5,100 but with the way the rupee has behaved, the FII flows that have come in and the way the RBI has behaved, that 5,000-5,100 top moves to be the 5,400 range but not too much above that. I would think that this rally would definitely lose steam closer to the 5,300-5,400 levels.

Q: It's been 'show me the money' kind of series that we have put behind us. What are you picking up about liquidity? Is it ETF money that's getting pulled in or is it long only funds that are picking up cash. What is happening there?

A: The data that we have been getting is the fact that there have been big inflows into emerging market funds and by virtue of being an emerging market, India is receding the so-called FII flows that it has. We are definitely not picking up any India specific money flow that's coming in neither are we hearing about any specific segment whether hedge funds or the long only is turning overactive.

No doubt we have seen domestics stay on the selling side but to capture the sort of move that's taken place on the dollar and to capture the fact that globally how are we constructive on emerging markets. Emerging markets is where the action is happening because Japan we can safely say will see okay growth given its low base, US is slow to moderate while Europe seems to be muddling through.

The Fed has maintained that liquidity will be abundant till 2014 and therefore while the capital is there in the system it's going to chase economies with growth and currently that's what the emerging markets are offering. I would say India is receiving its fair share of FII flows purely because of the fact that it's an emerging market and currently emerging market ETFs and asset classes are seeing global capital allocations.

Q: If your call is that the rally is about three-fourth done then how are you approaching it from here? Do you expect any sharp retracement or just a plateauing out in terms of performance?

A: Unlike last year when after a severe risk-on move like the one we have just seen, we would typically have a risk-off trade where the market would pretty much retrace or even fall lower than where the rally began from but this time around I just think that we have seen a lot of genuine cash market buying. We have no doubt that events will keep this market volatile.

Having said that I don't think this risk-on rally will be replaced by a risk-off rally. There is a higher probability that you will see a flat to boring sideways consolidation market post this risk-on rally versus getting a risk-off trade so that is a definite positive. If this market does consolidate and does marry around in 300-400 range on the Nifty, it will only augur better because there maybe towards the second half of the year we build a stronger base and then move higher.

Q: What would be that ranging base? Do you think 5,000-5,200 or do you think we will go and test 4,800 kinds of levels whenever the retracement happens?

A: I think 4,800-4,850 is possible because we have had such a sharp and severe upmove that when the steam dies out given that there are state elections and there is the budget and you have got stuff taking place in Europe, I don't rule out the possibility of the market getting nervous and jittery due to any of the three aspects. I would think 4,800-4,850 is a more realistic support zone.