Mkt to dip 6-8% in few weeks; bet on telecom, auto: BofA ML

The liquidity that drove asset prices up in emerging markets is about to run dry, and investors should now get ready for a correction. That's the view coming in from Jyotivardhan Jaipuria, head of research, BofA Merrill Lynch. "The market is likely to correct nearly 6-8 percent in the next few weeks and it may shift back to lower end of range," he told CNBC-TV18 in an interview.

Though there will be a few green shoots, with respect to authorities clearing stalled projects etc, but it is too late to start infrastructure investments now, he added. Also, according to him, the much talked about one- time diesel price hike seems to be off the table. All eyes are now fixed on to the upcoming general elections and Jaipuria feels that run to the polls and its outcome will now become a major overhang for the market. But he feels that things won’t pick up just because of new government. Meanwhile, earnings growth in FY14 is seen at 6-7 percent and foresees FY14 Sensex EPS at Rs 1,260. BofA Merrill Lynch is overweight on software, pharma , telecom and auto stocks, but prefers staying away from infrastructure as of now.  Below is the edited transcript of Jaipuria’s interview with CNBC-TV18 Q: It has been a smooth run that this market has had in the month of September. Do you think the party is over? A: Since the beginning of the year, our view is that it is a very range bound market and the range for most of the year would be 18,500 to 20,500. So, essentially the market slipped below that range and bounced back very quickly to the top end of the range. It was sparked by the Raghuram Rajan taking over as Reserve Bank of India (RBI) governor and announcing all those positive steps. In that meet itself he had said that I will not always be popular and there will be some unpopular steps I will announce. So people at that time chose to ignore that statement, so once the credit policy came in, they got reminded of that statement that he has a job to do and it is not the job of the RBI governor to be the most popular guy. Q: Yesterday’s CCEA clearance for a new method to auction coal blocks, is that a firm direction in reform, is that a positive that you would work into the market and your purchases in any fashion? A: Over the last few months, there have been lots of positive bits of news on coal, powers and in general on trying to kick-start investment. So, there have been bits and pieces, which have all been positive. If you aggregate that, it does sound like okay, as a package things are moving much faster than they were over the past few years and going in the right direction. My worry is that it has become now a little too late to kick-start infrastructure investment in a big way before the elections. Because just from a corporate point of view, you are so close to elections that you will not want to go and start spending now. From a government point of view, you are moving closer and closer to elections, which becomes an overhang. For example, there was lot of noise on diesel price being hiked very quickly after the parliament session gets over which now seems to be off the table again. So it has become that because of this election scenario, things are getting to a right direction but probably will not see the fruits of that till elections are out of the way. Q: This looks like a one time diesel price is off the table, will FIIs take it hard? A: It has been like there have been lot of expectations that built into the market. Slowly when those expectations dissipate that has been our view that this market is not going anywhere. It is just fluctuating in the range, the top end as well as the bottom in terms of the range is getting protected. As you move towards the top-end of the range, you need to get lot more positive noise to take it beyond and make it sustained. Otherwise, chance is that it will again slowly slide back to the bottom end of the range. Q: That is the thing with this market, it has frustrated investors for so long, people are just sitting and watching while we move from one end of the range to another, tactically how are you positioned now and what should the investment approach be? A: What we had in this bounce was obviously a big run in a lot of the stocks which had got beaten down previously. So banks had a great run, some of the rate sensitives had a good run. So our view is that we will get a correction coming in the market over the next six weeks. In that correction, sectors which will relatively outperform are these high valuation stocks like software and pharmaceutical, those are two biggest bets. We like telecom and we also have an overweight on autos so that is the fourth overweight, which we had.