Is Nifty stuck in a congestion zone?

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So I don't think that type of correction market down 50-60%, I don't see that and I don't think that is likely to happen. Once a lifetime confluence of events of people being massively overweight emerging markets, funds having to liquidate, redemptions, whole bunch or other things, I don't think that severity of a correction will happen again but I think the case you are making is that liquidity remains strong next three-four months, we get to move up 6-7%, retail gets sucked in and then a deeper correction maybe 20% kicks in.

I would say 30-35% probability is that it could happen. But I don't think 2008 type of correction is likely.

Q: I was not suggesting 65% fall in stock prices. I was saying could we go to 20,000 Sensex and then even from there come back to 15,000 which would look very difficult and stretched if we do make it to 20,000?

A: I think that is possible. There is one-third possibility of that because as you go up and already I am sensing that - we buy protection a lot recently these days. I am already sensing that from some people, I don't agree with that but some people already started to talk about that the market is not going to correct, doesn't go down every month and paying in 2-3% or whatever number and just waste throwing it away because the market doesn't correct.

Already that type of thinking is developing, already confidence is rising and to the extent the retail investor comes back and if that scenario were to play out obviously confidence will be sky high.

So I think there is a reasonable chance of that. I don't think it is a trivial probability. I will give as high as one-third probability for something like that happening.

Q: And what about this scenario - if we do go up 7-8% in the near term, go to slightly more expensive valuations but don't correct by more than 8-10% and then it becomes a trending kind of market and frustrates more people on the sidelines eventually going into fresh peaks in the next 6 months or so, as in a fresh all time high for the Indian market?

A: I think that is more likely, there is high probability because the pain I think is still amongst most professional investors in India. Most professional investors are not fully positioned at least to the extent people have flexibility in terms of their net long and net exposures.

Most people who have flexibility in that are not positioned for a big run away market firstly. Secondly, skepticism among most professional investors is still quite high in India. In the sense that the market has to catch a breadth, correction is due, valuations are too expensive, this is only foreign money, it cannot sustain.

So the pain trade for the market is still for the market to drifting up slowly and steadily and I think that is what is most likely to happen. Not a run away 5-10% in one two months.

I think what we are seeing today every month 1-2% it keeps frustrating people buying protection and keeps frustrating people who are underweight, people who are sitting on cash and that is the pain trade that is what is most likely to happen.

Q: So if the market has to move higher from here what carries it, so far no RIL, ONGC participation, limited participation from L&T, Bharti, do you think banks can continue to rally from where they have reached already?

A: I think banks have had a good run and if you look at where they are in terms of their interest cycle they are going to start raising deposit rates very aggressively because on an incremental basis loan deposit ratio is already over 100% and liquidity is trying to tighten. Logically I would argue banks should not do that well from here. But the point you make is valid that if new money comes in, I think banks will have to do well because that is one obviously place where you can absorb or you can deploy large amounts of capital and on paper they still don't look that expensive.

 If you look at PSU banks or some of the private sector banks, the smaller ones they are still at not absurd valuations. But its difficult to see how you will get 10-15% from here without either ONGC or Bharti or RIL or someone big kicking in. Because software looks like its done, its expensive, it cannot drive the market from here.

I don't think real estate will take off again but the other argument you can make is, its not an huge index weight but real estate is lagged massively that could another source of stocks which could catch up, But some of the two to three stocks you mentioned which is either Bharti, RIL, ONGC or real estate, one of these has to fire to get to the next level probably.

Q: Infrastructure is the other big cluster; do you think it can pull its weight?

A: Could be but infrastructure is not that big index weight. That also could be but I think real estate is more likely to be on fire than infrastructure. Though I am not a big owner of either, I still think it is probably one of the other ones; either ONGC or Bharti, someone out of them will fire over Reliance.

Q: Can the tail wag? Cement has moved this week and that has been a dog.

A: If you take cement from a slightly longer-term perspective, it is interesting. It is still too early in the sense that September quarter will be a disaster in terms of earnings and probably one of the worst quarters in cement stocks for a long time in terms of earnings.

But if you take a slightly longer-term view, cement is interesting definitely something to keep on the radar and look at investing in over the next six-nine months but cement is not big enough to move the market. You know that better than I do. In index it is not very significant, that cannot buy itself, take the market up.

What is also likely to happen otherwise is also this continued midcap fascination in the sense that midcap index or indices continue doing better than largecap and largecap remain stuck pretty much where they are and midcap continue doing better that looks again likely to continue for sometime.

Q: What is your gut feeling for the next three-four months as we head towards the end of this calendar? Is something dramatic going to happen as in a major Western market sell off of 20-25% or India taking off from here and going to a new high much before any of us think, do you see any of these dramatic possibilities playing out?

A: I don't see US market falling 20-25% at the moment likely because again there is a lot of bearishness in the US and if we look at market indicator, it seems to be pricing in a double dip, it is not clear that the economy would do that badly. So I don't see that type of disastrous fall in the US or the West right now. I think a European crisis could resurface in the sense that I have always said that all the measures have been taken in the last three-four months since May have postponed the European problem.

It has just pushed it out and given the countries breathing space so that will at some stage resurface and come back. That is one thing which could worry. I think the most likely scenario is what we said that this market will keep frustrating people who have been conservative and who have been buying protection and keep drifting up slowly and systematically climbing the proverbial wall of worry so to speak and it will just keep frustrating people like us who are more cautious.