Pair trades look juicy; long IT, pharma, short FMCG: Udayan

He further added that there is nothing as of now that suggests that the market is likely to head drastically lower from hereon, so traders should stick to buying on dips, he added.

Below is the verbatim transcript of his market analysis

The market might move up a little bit from here because it had a five-six day correction, went down to about 6,100 and then came back. It may be between 6000 and 6400 for now. I don't see this event being a trigger, which will lead the market to a gallop away from here. It may go back to 6350-6400, but might struggle a little bit there because there are a few factors which are reining in the market from here on.

Lot of people in the global space believe that what the Fed did overnight is a very bullish kind of an event, which means that next year we will see a lot of improvement in US growth and interest rates will not rise out there. If you believe this combination will exist for 2014 then it is a positive outcome. But there are a few question marks - whether the US will gallop away in terms of growth or the Fed’s move is more with an eye on the kind of fiscal strain that they are facing?

If US growth does begin to recover, will the market not push interest rates higher beyond 3 percent with the US yield even if the Fed remains extremely dovish? Most importantly in the context of a developing US economy and diminishing liquidity how will the developed market versus emerging market story play out? Will they all move up as sometimes most risk assets do or will it be a tale of two stories given the way things are staking up for 2014?

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The pertinent question now is what does India do in a context of good US growth if that is what the Fed is signaling? The recent numbers seem to be indicating of fairly tepid Indian growth and the RBI seems fairly overwrought about - in that context, there is diminishing global liquidity which is like mother’s milk for India. Everybody picked on how RBI paused because vegetable prices will come off, but RBI seems very overwrought about growth and is not quite thumping the table like a lot of analysts are about how growth has bottomed out and will gallop away from here.

So say Indian growth gets stuck between 4.5- 5 percent for the next three quarters, it is not inconceivable that that happens. If that coincides with the rupee not appreciating any further or mildly depreciating through 2014 because of the Fed taper and diminishing liquidity, then the rupee would remain under a bit of pressure, growth may not recover a lot and in the US liquidity for emerging markets would starts to taper down. These circumstances are not very conducive for a lot of money to come our way. While it is possible , though it is too early to say that the US market does well even from here on, will India receive a lot of attention proportionate to that and can India become an outperformer because everything in the global asset space is a relative game.

Today people are quite happy about the fact that the Fed believes that the US will improve but what does it mean for us is far more germane and material and you could construct scenarios where India unless growth recovers significantly, may not be the beneficiary of as much of the good feeling that is abounding in the developed market space today.

Meanwhile, if you believe what the Fed is telling you today that growth is on the rebound and that is the central reason why they have begun their taper, then you would have to get exposed to some of the export oriented sectors like IT and even pharma. However, it is better to do some kind of pair trades right now because they sometimes give you more juice. Consumers are looking quite weak, they have been under pressure because of valuation issues, but for the consumption trends which are coming about, some of the numbers are not looking terribly good. And you tie that in with the fact that the government is under immense pressure on the fiscal front and there is already a sense from Delhi that many of the spending measures will get curbed down.

If over the next couple of years there are more spending cuts, and consumption gets crimped further, then I think a trade where you expose yourself favorably towards some of the export oriented sectors against sectors like FMCG where valuations are still quite rich, and growth might still be quite suspect in the foreseeable future. So long IT, pharma, shorting FMCG may not be such a bad path to go down.

Cyclicals have been a subject of lot of debate these days in the market. On the ground, you are not beginning to see the numbers actually reflect even in a small way, the optimism that is recently seen in stock prices. I would watch with great interest over the next few months whether some of the numbers from the infrastructure space are beginning to reflect the optimism and the hope that you are seeing on the ground. My sense is that there might be some disappointments. The safer trades would be to expose yourself to the exports and go a little soft on the domestic consumers.