Market in bottom formation process: Prime Sec

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Market veteran N Jayakumar, president of Prime Securities feels the upside on the Nifty is capped at 5,100 levels.

The year has got off to a steady start with the market managing to stay in the green - although just about - for most of the time. According to Jayakumar, the market is in a bottom formation process at the moment.

"I think the adverse newsflow has been factored in and now the market is likely to focus on the positives," he said adding, "excessive correction in rupee and equities in the last quarter of 2011 is reversing."  

He expects midcap to outperform in the near-term. "We need crude to cool off for a sustainable rally," he said.

For now, his advice is to sell into rallies in commodity stocks. "I think export-oriented sectors will continue outperforming," he said adding, "...sugar will continue to underperform in the near-term."

Below is an edited transcript of Jayakumar's interview on CNBC-TV18. Also watch the attached video.

Q1: What have you made of this 7% rally in Nifty in last 9 days? Do you see more upside in the near term?

A: The excesses of the last year especially the last quarter of the calendar year 2011 are being reversed pretty aggressively. The currency movement including movement on the index was a complete capitulation in some sense. At least the portfolios did capitulate of most investors especially the foreign investors. The new money which was waiting to come in has started trickling in but 2012 has also brought a certain fresh perspective to it which it seems like there was no tunnel forget the light at the end of it in the last two weeks of December especially. In that context if you see the current year nobody knows really who the buyers are and yet a number of midcaps stocks have bounced off 20-30% in some cases even 40% from recent lows.

The beautiful thing about the whole movement has been that the index has done nothing much. A 6-7% rally is decent but really speaking Nifty is stuck in a range of 4600-5100 maximum and in that context a lot of stocks have done much more.

This kind of resilience that the index shows in the context of whatever headwinds it had to encounter, the rupee shows some strength despite recent dollar strength. The rupee has appreciated moderately in 2012. From the levels of 54 it is down to a tad below 52. In that context the first signs of bottom formation are now more and more getting established.

From a sector perspective there is clear rotation out of the IT, consumption and the leader spaces and move into private sector banks, infrastructure space and that rotation is clearly visible. The story is not really an index story, the story lies else where which is really the midcap beaten down space where without knowing who the buyers are and the stocks are up 25-35%. We are talking about a pretty sensible call that the bottom is around the corner and if you look at recent headwinds like the European down grade for instance what is it that the rating agencies have told us that we don't already know.

Also to some extent there is a lot that's getting factored in and my own contention is that bad news now will tend to get ignored faster and good news will tend to get lapped up. A few large policy announcements, some large orders and the infrastructure space will be up and running. A simple thing like the L&T Chairman who has been the biggest critic of the government doing nothing over the last 12-18 months suddenly came out and said things are not as bad as they seem. An optimistic statement from capital goods giant Chairman boosted up that space which makes me believe to some extent bad news has been over factored in and good news will push up stocks much more than people will anticipate.

Q2: Do you think the meat of this rally will unfold in the course of the next few weeks and months? Is there a potential of a pre-budget rally here?

A: Depending on what you consider a rally 95% plus of the market is focused on the Nifty. The benchmark index is trading in a plus/minus 5% range which will not excite most people. Just take a look at what's happening to the midcap infrastructure space. GVK, Lanco and GMR Infra companies were giving a sort of bankruptcy pricing indications in the stock market and now they have started bouncing off. There is news about road orders and the Power Ministry taking steps to make sure that things are available for power generation. Even though some of these steps are relatively small but it is enough to kick up a reasonable amount of action in this space. Many of these companies are quoting at 1/10th to 1/12th of what they used to quote at peak times or peak multiples. So from that perspective the correction is completely overdone and maybe the story lies there.

Another story can be the heavy engineering space. Some of the recent safe havens like IT, FMCG are clearly meeting headwinds and had their run up and they are sort of tapering off. So it wouldn't surprise me to see this story to continue where public still looks at the Nifty or the index for some kind of a relief to say that there is a bull market on and they are not getting any clear indications. Yet the meat of the market which is the midcap space displays strength and momentum which is belied by the lack of strength in the frontline stocks or the index.