If Sensex touches 20000, midcaps will participate: IIFL

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With Mahurat trading coming to an end for 2011, market did not fare too badly. Nirmal Jain of IIFL tells CNBC-TV18 that the valuations in the broader index are beginning to look attractive.

He advices investors to break up their portfolio in such a way that part of it is in equities but a larger chunk is placed in fixed deposits and gold.

Jain's stock bets are on ITC, Sun Pharma, Bajaj Auto, Infosys and HCL Tech.

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

Q: What are you telling your clients to do in terms of asset allocation? Last one year, fixed deposits, gold etc have done well, stocks have done badly. How do you carve it up this time?

A: One has to continue the same allocation which is a part to equity and significant part of your assets should also be in fixed income as well as gold. I don't think in a market and in a world like this, you can put all your money in equity and sleep peacefully. Even if things improve at home, there are global cues that can be very volatile and can be very unpredictable. In a market like this, you will have to allocate your portfolio to different asset classes.

Q: How much do you postpone expectations of the big one by seeing the market tear away in new highs, the Nifty piercing 6,000? When does all that stuff happen?

A: Market is always very unpredictable so even if that happens before new Samavat I will not be surprised. We actually had almost four bad years from 2008 onwards, in especially midcaps which most retail investors hold in their portfolio. They haven't done well. Now the entire midcap universe is at a valuation which is very attractive. But they have just become orphans. Nobody wants to talk about them because people are charitable.

I don't know whether people are charitable or promoters are just doing some more trading on buying midcaps. I don't think the retail customers have yet come back to the market. If you look at the long-term trend of the market then valuations become this attractive and if there is some trigger then the midcaps can bounce back with a vengeance.

If I am long-term equity portfolio then I will buy part of that portfolio in midcap and keep it because even if they remain sluggish for sometime whenever they bounce back then the beta is very high and they can give very high returns. If you have a view to hold it for three-five years, then I am sure there will be one or two good rallies and good bull markets that we will see.

Q: What is the probability that we see a 20,000 Sensex over the next 12 months?

A: I will say 50-60% probability that before the next summer we will see 20,000 Sensex.

Q: The obvious expectation there would be that high beta would start to participate. Do you expect to see that happen at some point next year?

A: As the Sensex reaches the psychological level of 20,000 then midcaps will start participating. When they participate the liquidity is so thin. Today, if you identify any good quality midcap and say you want to build a 5% stake in it, it may not be easy in all the stocks. If Sensex starts reaching 20,000 we will see very good action in midcaps. They have been underperformers for the last two-three years so this year their time may come.

Q: If a friend called you today and said it's Diwali - you make a five stock portfolio for me and I will hold it for two-three year where I can make a lot of money. What's that portfolio for him?

A: If you want to buy stocks and forget about it I would prefer largecaps or large midcaps. Those stocks can be stocks from different sectors like ITC, Sun Pharma, Bajaj Auto and Infosys or HCL. From the midcap you can look at a stock like Indraprastha Gas which is in a niche segment and quite immune to all these cyclical ch