Buy domestic eco-oriented cyclicals: StanChart Sec

Latha: What is your sense, do you think this global risk off that we have seen is going to balloon into something larger that long awaited 10 percent correction which has not happened for several years in the US will happen now?A: I think it is quite possible. US haven’t seen a double digit correction for two-two-and-a-half years which is unusual. Typically 12-14 months is a maximum as per my data analysis. Historically the market goes with a double digit correction. I think we could see one or close to one now.Latha: What might be the collateral impact for us?A: High single digit close to double digit.

Sonia: The earning season has started on a good note with Infosys declaring good set of numbers but what is the sense you are getting about how this earning season will pan out and what could the impact be on the market?A: I do not think this quarter’s earnings matter that much from a long-term fundamental point of view for the market and that’s primarily because post the new government coming in the general expectation is that over the next 12-18 months economy will revive and earnings growth will pick up. So, the near term earnings from economy sensitivity and hence earnings sensitivity point of view doesn’t matter that much. What actually matters is, are things been done in the background which will improve the economic growth, overall demand scenario, infrastructure and hence earnings growth from a longer term point of view. Therefore, let us not try to read too much into the market correction and correlated to earnings. This market correction could be primarily because of a bit of a risk off and a bit of a volatility that we have seen in the global markets. I think the fundamentals of the Indian economy and India is in general on the improve and will continue improving into the next few quarters. So long-term one has to be very bullish despite short-term correction which is bound to happen once in a while. Latha: The point is taken that the new government can mend things in the long run but in the short run are you getting an impression that the market have run seriously ahead of themselves especially after those IIP numbers which for two months in a row are indicating complete stagnation even if they are inherently volatile and maybe unreliable number. This is a telling a story that cannot be not factored by the market. Therefore are you going to see some near term pullback of money especially by foreign investors?A: The monthly IIP numbers have been very unreliable and very non-trended, so I won’t read too much into that. Foreign money inflows can slowdown and there could be a bit of an outflow largely because of what is happening globally at this point of time. So, there is a little bit of uncertainty with respect to US tightening cycle, US rate hikes, global economy, once again the data and various other parts of globe has started weakening again which is having its own collateral damage. Fundamentally I am a big bull on India and the Indian economy at this point in time but even bull market sees and needs correction. The source of the correction, the reason could be correction, could be anything and very flimsy. So, let us not try to turn the fundamentals just because we are seeing some amount of risk off at this point.

Latha: Your worst case was 7,400, in the move towards 7,400 what maybe the leaders, which will fall the most?A: We think about it 7,800 to 7,400 is just 6-7 percent, it is actually difficult to say which will do double, which sectors will do half at this point. Everything fall 6 percent, market will be at 7,400 in two weeks time.Sonia: If this is still a buy on dips market, what are the sectors that you would be most bullish on now? Going forward do you think that it is banks that will continue to lead the rally or are you looking outside of the banking space for any leadership?A: As a general theme into this weakness domestic economy oriented cyclical need to be bought into but this has been one of my running themes also on your show for a year or two now that it is actually a theme less market, it is more of a bottom up market and I am going to reiterate that like a stock record. So in every sector you can find stocks worth buying and in every sector you can find stocks worth selling. Having said that if you are looking for a broad theme, domestic cyclical have underperformed the market in the last two-three months and in this weakness slightly more allocation to that space can be made.Latha: One of our guests was telling us that in the process of risk aversion that the global markets have unleashed, we could see some drastic cuts in the mid and smallcaps. I think he spoke about 20 percent cut possible in the midcap space. You fear that index could take a huge beating now in the short-term?A: In midcaps it will be stock specific. Historically if you go back and see the cases of other bull market corrections, unless the corrections are more than 20 percent at the benchmark index level, there have been enough instances of 8-10 percent bull market pullbacks in Nifty where midcaps have gone up as a theme in that time period but midcaps is such a diverse bunch of stocks with great quality companies to extremely poor quality companies, to name somewhere in between that I think to take a call on midcap as a family is very tough. Yes, midcap valuations have run up in the last few months because of strong outperformance so one has to be little bit careful on valuations versus RoE versus earnings growth while making a judgement bottomup call at this point.