Outside financials & consumer, mkt struggling for ideas: Udayan

There is a purple patch in the market currently and he does foresee threats to this rally. But what will precipitate them and make them materialise and when is something none of us knows.”

He said he was worried about what might happen in the course of the next three years.  “There is a possibility of a significant correction, but it is not India-led. There are many moving parts. Participate, but don’t go to sleep while participating.”

The price damage in large telecom companies is already done. Bharti Airtel won’t collapse, but Udayan says he won’t buy telecom stocks.Below is the verbatim transcript of Udayan Mukherjee’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.Latha: The markets meanwhile have almost reached out to all time highs. We are just a whisker away. What is the sense you are getting? No stopping this momentum rally for now?A: For now, there is nothing that you can do but to participate in this move. That is what we keep speaking about every time we speak is that there is no point trying to second-guess the market and talk about valuations coming in the way of the upward progress because that is not how markets work. When they are in a momentum spiral fuelled by liquidity, they will move in that direction and there is not much you can do about it.Now the question is do you want to participate or are you faint-hearted and you do not want to participate. That is your call but you cannot just say that because valuations have got expensive and earnings have not caught up to the extent desirable, the market will not move up. So, I don't think this is a case of whether the market will move up or not rather a question of whether you want to play along with the market or you want to stay out because you are defensive in nature and don't want to take extra risk on the table right now.It is instructive on that point to see what the domestic investors have been doing because they were broadly sitting out of this party for the last four-five weeks. When the market went sideways the Nifty just meandered in that 8,600-8,700 for a good four-five weeks or five-six weeks domestic investors were almost waiting saying, okay this is the market top and this pause that we are seeing right now is a prelude to a much deeper price correction. That price correction never happened.In fact, the market broke out of 8,700 and now we are almost knocking on the doors of 8,900 and last week domestic investors put in about Rs 1,700-1,800 crore. So, it is almost like they were waiting and they got frustrated and they gave up on waiting for the correction and they have entered the party and joined in the momentum. That is what the market will make you do in such phases. They will twist your hand and force you to participate because it is very difficult to sit out of a market, which is moving at this pace.Sonia: Lately we have seen a churn of leaderships. So, sectors like autos have started to participate quite a bit. ITC has regained a bit of leadership. The HDFC twins are back on the fore. How have you read into this churn and how should retail investors approach it now?A: The market is running on two pillars right now. I don't think, it is very broad based. One by one some of the sectors are beginning to put their hand up for underperformance. It has happened with IT, it has happened with pharmaceuticals, now it is happening with telecom but the two engines of the market remain and have been for some time financials and consumers. Anything related to these two themes is doing well.So, financials is private banks, now public sector banks have joined over the last few months. Housing finance companies, NBFCs that whole cluster is performing like a rocket. On the other hand anything to do with consumption whether it is fast moving consumer goods (FMCG), whether it is autos, you name it, that whole space. But if you look outside these two space, I know this morning infrastructure is in play because of this whole arbitration ruling but outside of financials and consumers, the market is now beginning to struggle for ideas.Now the fall out of this is that financials and consumers are getting more and more expensive with every passing week but the rest of the market is probably struggling to keep pace. So, I guess for retail traders or short-term investors who are participating in this rally for the last few weeks, they should dismiss notions of expensive for now and stay with the two pockets, which are performing and which are getting more and more expensive because as I said this is a matter of tagging along with the market right now and not taking big calls and valuations and therefore not participating because you don't know how long this rally will continue and these two sectors may go up 25-30 percent more and you would just have sold out too early. So, it is better to let the market tell you when it wants to stop rather than you deciding when it should stop.Anuj: The other important piece of the puzzle is Infosys. For the first time since Vishal Sikka took over the stock is at 52-week low and while the market is at 52-week high, do you think this is a passing phase or are you sensing some bit of de-rating in valuations even from here on. I ask you this because you have tracked this company for more than a decade now or nearly two decades now?A: As I said last time, Infosys right now is suffering from a bit of technical hangover for all the addition in ownership that it loaded on for the last year as Vishal Sikka was performing quarter after quarter. Some of their sheen might have come off and therefore a little bit of that ownership problem is getting corrected.Generally, my views on IT have not been very constructive for the last couple of quarters, you know that. I still think IT will struggle from hereon and the weaker companies will get completely lambasted. You have seen that happening with Wipro to an extent, you are seeing signs in some of the midcaps like Mindtree as well.So, this is going to be a difficult phase for IT as a sector. On Infosys particularly, it would be fashionable to say that dump that stock but my sense is that valuations of Infosys have come down to very attractive levels cracking their long-term averages. Now, this is not to suggest that you should jump in and buy Infosys right now but the time to sell that stock is probably gone because the price correction has been fairly significant and once again very swiftly Infosys has built out another 20 percent valuation gap between Tata Consultancy Services (TCS) and itself, which it had closed after so many years.So, now the price damage is done in Infosys but for the overall sector, it would pay to be a bit cautious from here on because IT probably has a few rough quarters ahead of itself.Latha: How do you approach finance, in fact the entire finance space? Banks, non-banks, small banks, private banks, public sector undertaking (PSU) banks, the outperformer here is public sector undertaking (PSU) banks, surprise except for the odd Ujjivan Financial Services and RBL?A: You have to play along right now. I know some of these pockets within finance as you well know have become quite expensive. But you could have said that maybe one month back and could have missed another 10 percent of that rally. So, we have to understand what kind of money is coming in. I am not saying this is stupid money, which is walking into India but the colour of money is passive at this point in time. Active fund managers -- if you ask them -- are probably not getting that much money and therefore what works in passive money situations is big country plays.So, when you look down or from outside India you are not a very active fund manager and you ask around saying what works in India, they will tell you two things work in India. One is financials because you have great banks, and financials will always make money for people with exceptions of PSU banks every other year and consumption stories because consumption is kicking in India right now and you have got more triggers for this consumption theme. Therefore that is what the passive money will walk into. So, you just have to be where the money is flowing into and you just cannot stay out of financials in a market like this.Within that, do you want to slice and dice the game and say something has got very expensive, move it out and maybe move it back into some of the pedigree blue-chip names? So, sometimes you will sell an NBFC stock trading at 4.5 times book and say if I have to pay that much, I might as well move some of that money into HDFC Bank for that valuation or IndusInd Bank or Kotak Mahindra Bank, that kind of churning you can do within the portfolio but should 30 percent of your portfolio be in the financials, there is no way out of that.Sonia: I know at a time like this people don't generally like to talk about the downsides or the threats to this market but it is better to be cognisant of that. It seems like it is a purple patch for the market now. But do you see any threat looming on the anvil?A: There are many threats, which are possible. What will precipitate those threats and make them materialise and the bigger question when, is something that none of us know. So, could you make the case for a significant correction in global markets? Absolutely yes. Could it happen in September if the Fed surprises with a rate hike? It could. But equally easily the Fed may not move. In fact that is the consensus right now which could pave the way for greater extension of this rally before the correction happens.So, there is a case for a correction, which is why you cannot be very relaxed participating in this rally at this point with the point, which I keep labouring every time we speak. But will the correction happen after the market moves up another 10 percent and the correction then brings it back to where you are standing today? So, you say the correction starts at 8800 but the correction might start from 9,600 and bring the market back to 8,700, then you are no better off. So, this is a matter of timing which is impossible to do. But I don't fear talking about the downside. I am worried about what might happen in the course of the next three months. There is a real possibility of a significant global correction at some point. This is not going to be India led. The case for correction in India is probably only valuations and none of the other metrics. The case of correction globally is not just about valuations, there are many moving parts, which can trigger of that correction. So, as I keep saying participate but don't go to sleep while participating because you might be woken with a very rude jolt one day.