Midcaps to power markets in 2010: Prime Sec

RELATED NEWS 2010: Bumpy year ahead for infra? Mkts to rise 20% in 2010: Satish Betadpur 2010: A year to buy undervalued assets 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 Nifty BSE | NSE 09/02/12 Are Mutual Funds betting on Nifty?

N Jayakumar, CEO, Prime Securities, expects the market to make a new high in 2010 on lower volatility. He is bullish on the midcap space and advises a bottoms-up approach. "There are a number of undiscovered stories, undiscovered spaces, which are going to be the adrenaline and kicker for the coming year."

Here is a verbatim transcript of the exclusive interview with N Jayakumar on CNBC-TV18. Also see the accompanying video.

Q: What is your prognosis for 2010 in a nutshell?

A: In a nutshell, we will make a new high. Contrary to what people believe, the year will be low on volatility. The principle reason there being that a lot of companies are raising money. India will continue to get the capital it needs in the primary markets. Corporate India is keeping all the protection and the insurance in terms of raising money, so the market downside seems limited. When the downside is limited, the upside will surprise us. We will make a new high and that will be marked by low volatility.

Q: If you are betting on a new high, do you think it will be front-loaded or people would get an opportunity to buy and then the market will go to a new high?

A: Markets are never so accommodative. Even today, the public kind of has the money. The risk appetite is slowly coming back. But if you just take a look at the F&O data, virtually every stock is in backwardation. The striking feature is that virtually every Nifty stock is quoting a backwardation. This means that almost nowhere is there a serious long position built up, where people are kind of leveraged etc.

The greatest gift to India was allowing insurance companies to buy over the last two years. What we haven't noticed is that they are buying quietly. This is the buying that goes principally in the Nifty 50 stocks. If there is a straw poll that CNBC conducts, you will find that virtually nobody has put money in frontliners especially in the Nifty 50 stocks. Foreigners short the Nifty to hedge against their portfolio. So, you are seeing the Nifty going up, participation is limited, and you have new highs being made with virtually no conviction.

Q: Do you still sense anxiety on part of investors -- institutional and high networth -- of having not participated yet?

A: If you talk about the investors who have been in India, whether institutional or hedge fund investors, for the last even 10-15 years, they are running net positives or net neutral positions. If it is net long, it is probably at the lowest net long that they have been in their existence even today. I don't want to give names because that is not the objective here.

But most people, who have been long in serious measure through the better part of the last 7-10 years, have got 15-20 stocks that they have shorted for every 10-15 stocks that they are long on, trying in some sense to capture the higher gain from one vis-�-vis the other. But the bottomline is that people are ready to short, people are ready to buy insurance because everybody has 2008 writ large on their screens, if not on their minds.

I have a theory on why insurance has got so much money. I don't have anything to base this on. After 2008, as the recovery slowly began, people said let us take more insurance as we don't know our future. I think insurance premia is a function of the psyche at the end of the day. That has been the fundamental bulwark of our market because nobody counts their investment in mutual funds as an exposure to market.

I think people have the money, have the risk appetite, so every asset category is coming back. I do sense some bubbles building up, but the anxiety of direct investment is not there, which is why we are so bullish on the midcap space and the bottoms-up approach because undiscovered stories, undiscovered spaces, which are going to be the adrenaline and kicker for the coming year.

Q: Will we hit a new high in the first two quarters?

A: There is a good possibility. When I say first two quarters, I mean the June-July period. Without unnecessarily pinning myself to a date, we will have made a serious attempt at a new high by September 2010. Maybe concerns come in, maybe tightening of money etc, but one of the universal truths in the market today is that markets have sensed liquidity coming into them in some form or the other.

If you go back in time when the yen carry trade created leveraged money and more recently the dollar carry trade and then the stimulus packages which have just been pumping in money, the markets have sensed liquidity. So, it is going to be very difficult for central banks in my opinion to pull money out en masse if you will. There will be some tinkering here, some tightening here, the Australia Central Bank for instance has already started tightening. But other than these isolated pockets, it is going to be very difficult for money to move out especially when it has tested blood in these markets.

We may well look back and say that this entire 2008-2009 might have been a 12-15 month correction where institutions across the world panicked and then the lender of last resort, which is the central bank, came in.

While people have been arguing about whether it is a U-shaped or V-shaped or W-shaped, I thought one should coin something to keep this debate going. My own feeling is that it will be more tick-shaped, which means that the high made will actually be higher than the high made earlier. We may have a V but it is an extended V. It is like a tick mark which indicates that the correction maybe complete. So, this is the little thing which amuses us a bit.