Investors don't panic, current mkt correction healthy: IIFL

Meanwhile, Jain recommends investors to take a balance approach now with a portion of the portfolio being invested in IT and pharma which are defensives, and the rest into cyclicals and quality stocks like L&T, Crompton Greaves, Voltas.

Below is the verbatim transcript of their interview on CNBC-TV18Mitali: What about the big global cloud that seems to be looming over the emerging markets? Has it really come down in a bit of a rush through January and February?

Udayan: It has not been a great start to the year. In August-December, we had a very good run in the market and that paved way for fairly strong expectations going into 2014, but at the real onset of the year, we had some clouds coming up on the EM radar. FII outflows have been about a billion dollars and that has been the root cause why our markets also gave up about 300-400 points in fairly quick time. Going into February, the key thing to watch is what the global mood is.

I know there is a lot of talk about the vote on account, elections coming closer, but the January correction was an EM phenomenon. If we see this kind of turbulence in the global space for whatever factor, whether it is accelerated tapering, the news of which the market got about 10 days back or it has to do with some basic question marks about growth and interest rates in the emerging market spectrum over the next few months, that may well be the key to determining how markets turn out.

We have an interesting situation in front of us going into this month. The next couple of months might well belong to the global mood till we get closer to the elections and people start building positions ahead of that. So, there are very important local events this year, but for now, it maybe worthwhile to examine the global cues in slightly greater detail just for the moment.

Mitali: Two interesting observations come out of what happened in the last two months, one, there has not exactly been that much divergence between developed markets and emerging markets. The Dow had the best day it has seen this year on Thursday because of the jobs data, but otherwise they have not done that well. Two, the interconnectedness between markets is back. Everyone is talking about an emerging market currency crisis. It is spilling into the debt market as well. That interconnectedness in terms of the nervousness slipping from one to the other has started again.

Udayan: There are some worries coming up in developed markets as well. Not everybody, those markets have been on a bit of a scorcher, both the US markets and the European markets, but of late, there have been some murmurs that growth might disappoint going forward and that had a bit of an impact on developed market performance as well.

The fulcrum of the kind of worry that one hears in the global spectrum these days is centering a lot about emerging market growth, particularly economies like China which are giants and there is clear fear that growth might disappoint in 2014. All of this could be just an early year flutter and nothing more. On the hindsight this maybe a buying opportunity as well that after a very strong run of 6-8 months the market needed some reason for correcting, both developed and emerging markets.

What you have seen over the last six weeks maybe just that, nerves might stabilise and then this might on hindsight look like a buying opportunity at the very start of the year. So, it is an evolving situation. I do not think the die is cast completely yet, but the last 3-4 weeks have served as a bit of a reminder that it may yet be a bit of a bumpy road ahead over the next few months.

_PAGEBREAK_

Mitali: What about the local setup right now? Shoulders are sagging again with the way this month's earnings performance has gone by. It has talked more about the elections and I do not think people have very high expectations of the vote on account.

Udayan: Those are the three cues that local market is made up of right now. One is the vote on account which is an event. I do not think it is a big event for the market, but there will be the usual media build up. The arithmetic is pretty much cracked on the 4.8 percent number. The finance minister will present that number with a last minute desperate bid to garner finances. It will crimp growth.

You will find it in the current quarter's numbers, but I doubt whether the sky will fall on the market's head because of what happens at the vote on account. That leaves us with two other cues and that is what is going on with earnings season and over the last few weeks earnings have not been great, they have been patchy at best and some sectors have surprised.

We still have some important numbers like Tata Motors, Tata Steel, Oil and Natural Gas Corporation (ONGC) coming up over the next few days, so it is not over, but we are wading through the fag end of a fairly patchy kind of earnings season. Also, there is politics that will not go away till it is done in May and June or in April and May.

All the recent talk of the non-Congress, BJP parties coming together once again to form some kind of a third front might have made the market a bit edgy on the margin and people will watch this space closely. Hence, all these factors might lead to a bit of volatility from time to time, but the key thing is what is going on with the global mood and with global flows. That will determine at least 80 percent course of the market in the next few weeks.

Mitali: How have you read the deep correction that most emerging markets including India have seen? Is there a technical buying opportunity opening up? Can you see this market rally back or do you think there is more correction in store for us?

Jain: Most emerging markets witnessed outflows in the last few days after the news of accelerated tapering in the US. Besides that, there have been local problems in most of the emerging markets and they are different kind of problems. In India there is a political uncertainty, but if you look at Brazil the GDP is down, in Thailand there are riots and in Turkey interest rates have been almost doubled overnight and currency is facing a huge selloff and the issues related to currency there. But relatively, India has done much better.

Our currency has been holding out and as a market this correction is a healthy correction and so, there is nothing to panic. Of course these were the factors that were not anticipated till December, but such is the market that you cannot foresee tomorrow with clarity. There will be events, there will be things, there will be news that you could not anticipate and that is what is happening in the market. While the uncertainty has increased, the market still has a positive underlying bias which is even seen in the way it has corrected.

Udayan: The Nifty came down to the 200-day moving average and found some support there. Do you think that will hold out over the next few weeks? Will this just be the extent of the correction, nothing more meaningful?

Jain: Nifty will hold out at this support level quite well. If you look at the entire emerging market basket, China has a huge scare of shadow banking. There is another bubble that investors are worried about. Most long only investors today are a bit hesitant about increasing their exposure to China. Many of them are cutting down, which has been a large competitor for the FII money available for emerging markets.

Within the emerging markets, we are better placed and the probability of a stable government is becoming stronger and that is driving many good quality investors. At every correction, at every fall there are investors who are looking at buying opportunities, those who missed out earlier, those who have equity money and so, unless something unforeseen happen, this support will hold out.

Mitali: Emerging markets have been hit by big global whirlwind. How do you feel India is placed right now and where do you think we are in this corrective phase, almost done or do you foresee more pain in February?

Agarwal: I think there could be a bit more downside. I do not think the turmoil or the volatility that we have seen in the emerging world will subside so easily because the US has stared the process of slowly unwinding the bond purchase program. It is only the pace which can be debated or can be varied going forward little less or little more, but the process has started and this will bring in some level of adjustment in the liquidity and fund flows and 4-5 weeks is just too short a period for that adjustment process to be over.

Udayan: You have got used to this USD 20 billion of an annual inflow from FIIs, good GDP or good earnings or not. Do you think 2014 could be different?

Agarwal: That is my fear. Sentiment around flows is extremely difficult to predict, because it changes very quickly. It can change in a fortnight. It can change in a month, but the fear that I have is exactly what you have said. One, we have started taking USD 20 billion per year inflow for granted. Two, since 1993-94 when the markets opened up we have seen only two years of outflows. 1998 was small. So only one year of outflow, 2008, is meaningful.

No other emerging market has that kind of flows. Every emerging market goes in through phases of outflows based upon variety of reasons, either domestic economy or global liquidity. We have not seen a significant outflow year yet and that is a risk rather than a safety cushion.