Markets will take sharp knock if FIIs sell: Madhu Kela

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

Q: What is the upside potential here for the market? Is it a possibility that there is a big move up before we see that correction everyone is waiting for or will it continue to be this grind up variety because as someone pointed out this month we have got just under USD 3 billion in cash and the market has moved 1%?

A: That is clearly reflecting where the market is because there are many takers for that USD 3 billion. There are these public sector companies, which are coming for IPOs. There are the QIP which is happening from the private sector. There is the secondary market which is hungry for that investment. It is clearly showing where the markets are and what the situation is.

I believe that there is one possibility, which is hypothetical again, which is like you have a big quantitative easing because of the problems in the west and significant amount of liquidity is pumped into global markets as a whole and the market gets a sense that interest rates are going to be lying low for a very prolonged period of time. In that situation-and if there is no disaster which comes in from global market in terms of any country going belly up-then clearly you will see lot more money come into markets like India.

But whether that situation is ripe? I think before they do any significant quantitative easing, worldwide, I would like to see if they see the asset price correct. Asset prices across the world have not corrected enough to do that kind of a panic.

Q: In India we work on a different year-from Diwali-to-Diwali. So where do you see the markets this Diwali and where do you think we will be by the time we get to Samvat next year?

A: I think next Diwali is easier to answer, so I will choose that. I think next Diwali is certainly the index will be higher because what I spoke to you is clearly about what I see in the short-term. But in the medium-term to long-term, I am getting more and more bullish because of what is going around in the world and what is going on in India-if you see the passing of the DTC Bill, which everyone was so afraid about, I think the final print is far more heartening than what all of us are believing that the government will do.

So I think here things are progressing well. We are on for a 9% plus growth. The domestic saving rates are very good and going to what is happening around the world, I think medium-term prospects are very good. So if at all there is this correction, which comes in, which all of us are anticipating, I think that could prove to be a very good buying opportunity.

Q: You think you will get to buy around 5,000 Nifty or do you think it might stop at a higher floor this time around or do you see us revisiting 4,700-4,800 again? What is your own gut feeling?

A: I am not trying to avoid this question but it is very difficult to pinpoint numbers. Let this event unfold but I don't rule out-there can be a 10% correction in a market, which has gone up 120% in the last 12-18 months and given what the fundamentals are can there be 10% correction?-possible. Can there be a 12% correction?-that is also possible. So I would not like to hazard a guess on the number but I have told you where the direction probably will be.

Q: You took that call on pharmaceuticals before most other people but do you think the current run in many of these pharmaceutical names-smallcaps and midcaps-is justified or is there a mini bubble brewing out there?

A: This is clearly not justified in many of these smaller names because we have clearly stayed out of a lot of these small companies and wherever there is pharma-as we have seen in the past that wherever there was infrastructure, wherever there was IT, there was a frenzy. So we are certainly not bullish in all the companies wherever there is a pharma name. I can clearly see a lot of frenzy in the smaller names and we have clearly stayed out of that pack.

Q: You took a similar call on consumption related stories and it is a much smaller universe and it is probably more out of whack in terms of valuations. How are you feeling about the way the market has chosen to move those stocks?

A: Again out there, we have chosen to book profits, selectively, wherever we feel that near-term and medium-term the stock prices have run significantly ahead of our medium-term estimates of earnings-we have chosen to take profits even selectively on those names.

Q: The other observation that was made by the time we wrapped up this series was that perhaps there was overheating technically on the F&O side-again something we haven't seen since 2007. Does that worry you-the internals of the market?

A: The overall construct of the market worries me a little bit and we have seen many markets-we have seen 2000-we can say that the market is bit overheated but it could prolong another twelve months if there is significant amount of money which gets pumped in from FII investors. As I constructed the overall picture including the technicals, which you just mentioned, it is a bit worrisome for the current market.

Q: If things did get hairy in the next three-four months in the west, do you think it will be a replay of 2007-as in the West will fall hard, emerging markets like India will fall as hard if not harder or do you think the lesson has been learned in the last couple of years in the last fall and this time the picture might be different that we may fall but may fall less and in that sense relatively outperform the west in its problems?

A: First of all, even I have a view, which is not a strong view as I have on India, but even in the west there are too many people who are prepared. Let us not forget, 2008 came all of a sudden. Now for last two-and-a-half years, people have been cautious. So I do not think the markets will be as hard hit as it was hit in 2008 because technically the markets were significantly overbought in 2008 and the preparedness of investing class was not as well as it is today.

So I don't see that repeat of 2008 happening. It will be more of a benign fall, which is what we are talking of maybe 10-15% in nature. In India, if the market in the west falls and if the FII money stops or slows down or if there is a negative flow, I think we will be equally hard hit in the short-term.

However, because of our fundamental strength and the brighter of prospects for medium-term and long-term, we will be the first of the few markets to recoup those losses and gain momentum as soon as the market starts to stabilise.