''Pockets of bubbles' in midcaps; 10% correction not ruled out'

Stating that there was "clear and present" danger of a correction in stocks, veteran financial commentator Udayan Mukherjee said a 10 percent downtick could be on the cards.Citing the price action in frontline stocks as well as midcaps, Mukherjee told CNBC-TV18 in an interview that the largecaps seemed to have 'lost momentum despite good news' while pockets of bubbles had formed among midcaps.He, however, added that while a 10 percent correction cannot be ruled out, the Nifty will likely stay in the 8,600-8,900 range till the US elections, from which a positive outcome could propel stocks higher.Sectorally, Mukherjee said private banks had lost momentum, commodity stocks may surprise during the upcoming second-quarter earnings season while IT should be stayed away from. "I would closely monitor TCS earnings and commentary before taking a call [on IT]."Below is the transcript of the interview on CNBC-TV18.Latha: What does it look like in the markets? Do you think they are going to plumb lower levels or is that support coming in at 8,700 looking a little solid to you?A: My sense is as we were discussing last time around, the market has lost quite a bit of momentum at least the largecaps have. I don’t know the reason for this because it is clear that the market is unable to scale the levels of 8,900-9,000 despite good news. We had a rate cut which was mildly surprising but the market is lower than where it was on that day and that tells you that the market is not responding to good news to climb higher levels or take out those resistance levels. So I think largecaps have lost a lot of momentum.The only reason that the market has not corrected significantly is that the broader market continues to outperform quite significantly and that has held up sentiment for now. The midcap index was up nearly 4 percent last week while the Nifty not moved too much at all. So as long as the midcap, smallcap performance continues to be one of outperformance, I think the market will probably not correct very significantly. You may still get stuck in that range of 8,600-8,900 while the broader market does well and that would be a very good scenario for the market. If it consolidates, while the broader market does well and portfolios continue to generate money, that might be wishful thinking for the medium-term but in the short term, if that holds out, it is an excellent outcome.Anuj: In that case, is this market a bit vulnerable? We saw on expiry day, this news of surgical strikes and of course the impact on the market and some levels were effortlessly broken and on that day, the midcap index was down about 5 percent. So is this a bit of a dangerous game right now picking on individual midcap at these levels?A: I wouldn’t buy a lot of midcaps right now because there is a clear and present danger of some kind of a correction. To me, there are two options for the market right now or two scenarios, which might play out just for the next four-six weeks. I think reading up to the presidential elections in the US, it is not impossible but unlikely that the market takes out 9,000 and goes to a higher level. Nothing is impossible in the market can happen especially if a couple of the debate go the way the market likes. It could happen but I think the scenarios that I link towards are twin. One is that the market remains in a range till it figures out what happens in November with that very important event and that range could be 8,600 to 9,000 for now.Just beneath that, you see midcaps being quite robust and I don’t think market participants would worry too much about that scenario. The other is that the market tires out because of this sapping momentum and often when you see the markets grinding in a range, unable to move it and form a new high, sometimes it takes two steps back before it can muster up the energy to go and scale that peak. So I don’t think 200-300 point correction qualifies us that two steps back.So the second scenario could be that there is a deeper cut in the market during or through result season or running up to the US election result over the next four-six weeks and that could drag the Nifty lower. I don’t know, I am not a chartist but maybe 8,200-8,300 kind of levels as well and that would qualify as a fairly significant 8-9 percent kind of a drop from the recent peaks.I think one of these two scenarios have the highest probability of playing out over the next month to a month and a half and after that depending on how events pan out, you can take stock about the end of the year once again.Latha: You think 9,100 or a new high is still very much possible in 2016?A: As I said, nothing is impossible. You could construct a scenario where the US election result is something which the market likes and as we go into that event, the market will hedge its bets and those hedges might come out if the event is good and you could see some kind of release which results in a risk-on in global markets and you have a strong December and you can go to 9,100. Before that, could there be any correction? That is equally possible. So both things are very much on the table now -- a possibility of a correction and then a strong end to the year depending on how things pan out with the US election result. So nothing is impossible.We are talking only about a range of movement of 10 percent in the market over two-three months period, 8,200 to 9,100 is just 10 percent. So both of these scenarios might pan out, nothing is impossible but the fact that since the day of the Budget, this market has not had more than 3 percent kind of correction, leads me to believe that at some point in the next couple of months, you will get a little bit of a scare in the market. Because it is generally unusual that you go through periods of 8-9-12 months without even one significant correction. There are lots of events which might precipitate one. I think there is a certain amount of complacency in the market and there is a risk of earnings not being great, valuations are already quite stretched, midcaps in pockets have built small bubbles for themselves.There are lots of events which might precipitate one. I think there is a certain amount of complacency in the market and there is a risk of earnings not being great, valuations are already quite stretched, midcaps in pockets have built small bubbles for themselves.So the situation is quite ripe for some kind of a correction and I think it will be fairly healthy for the market. I am not in a camp, which believes that the market breaks down completely from here. I know some scary scenarios have been painted also, I am not suggesting that but I think a 10 percent kind of correction from the recent highs is something which is very much on the table.Anuj: One stock which has been forgotten is Infosys, in fact, on Friday it was within Rs 3 of 52-week low and of course we will have earnings now. Do you get a sense that the worst could have been priced in?A: I did think so for a while that a thousand would hold for Infosys and it has been flirting with that level not quite taking it out very significantly, bouncing back a little bit but then hovering around that level. So I think a lot of the price correction has been done at Rs 1,000 but I would watch Tata Consultancy Services (TCS) results and commentary very closely this week as well because that is a bellwether and if that tells you that things are a little uncertain for the next few quarters and TCS generally gives you a fairly reasonable kind of a projection about what lies ahead, we have already seen NASSCOM come out and talk about the possibility of a high single-digit industry growth this time around. So I think the ground is set for the markets to now price in lower growth.It has done some of that already and with most of the leading stocks but the question, which I am debating with is whether there is one more leg down to price in the scenario, which is brewing with IT and whether these stocks can lose another 7-8-10 percent from here before they find their basis. That could be Rs 900-925 for Infosys, which I previously thought is an unlikely scenario given it where valuations have corrected to but if this week\\'s commentary is not great and the market gets the feeling that this is going to be a slightly longer weight for the IT sector as in people would need to wait for three-four quarters before an uptick in growth once again then it is conceivable that these stocks lose another 7-8 percent, which would then amount to fairly significant underperformance for the sector compared to what it has done compared to what it has done versus the markets during the course of the year already.Latha: Among the best performers this year have been the metal stocks. Is there still some trading juice here?A: What is going on in the commodities complex is something which I am finding very interesting now and a bit confusing because if you see last week, there are so many signals, which are so important for the market, one that gold and silver corrected quite significantly, the fact that Organisation of Petroleum Exporting Countries (OPEC) is increasingly paying -- after that waiting game of the last many months OPEC seems to have come into the market and it is trying to stabilise prices and crude has gone up and that has so many ramifications for how basket of emerging markets will do versus markets like oil consumers like India -- if this kind of intervention and support continues. That has a big say on fund flows itself because already we have seen that India is underperforming some of the oil producing emerging markets and if that gets accentuated with the passage of time given what crude is doing that is something that one needs to take on board and we have seen strength in some of the metals as well.So this whole commodity complex becomes very important now in determining fund flows, in determining what happens with margins going forward. It has inflation implications but it is too short a period of time to take a call on that but I would watch the commodity space very closely more than just taking a call on whether Tata Steel has some more leg to run up because it has built up long positions. My sense is that the macro implications of what is going on in the commodity space over the next few weeks becomes very momentous for the market.Latha: This earning season, what would you advise investors to start long with?A: It is easier to say what will be good avoids in this earning season. So you know what you do not want to bag before earnings come out. IT is a safe one to avoid, there might be volatility, which very sharp traders, might capitalise on but fundamentally it will not report great numbers.Private banks -- it is a tricky one. A lot of it is in the price. You can see that private banks have lost a bit of momentum going into this earnings season, last quarter too you got news which was not great likes of Axis Bank, ICICI Bank and therefore the market is a little nervous -- generally between last quarter and this quarter, private banks have done well despite not very great news in the previous quarter but as we get closer to the earnings, little bit of nervousness because of what might come out with the asset quality numbers, is keeping the market on tenterhooks. So, it is not an easy call to trade private banks before their earnings come out because there could be fairly significant movements on the day when the results come out.Infrastructure -- I don’t know whether numbers will be great because even last quarter Larsen and Toubro's (L&T) numbers were nothing spectacular, the stock has lost quite a bit of momentum of late and I think the market is sensing that what it had priced in, in terms of a turnaround in the capex cycle might take longer. So it is one thing to say you want to cherry pick a couple of specific midcap infrastructure ideas because they are riding on large orders. That is micro but generally as a class, it will be difficult to take a long call on infrastructure as a space before the earnings come out. I have no great expectations from telecom either.So this bunch, IT, telecom, infrastructure probably some of the private banking looks like they could be tricky waiting into before the earnings pop out.Consumers -- a lot of it is in the price but that is the space autos for sure where the numbers would be good but has the market completely priced it in after the monthly numbers and the series of positive momentum indicators we have seen that sector -- probably yes. I think you could get positive surprises from some of the auto ancillary stocks because they have been on a good wicket these last few months. So specifically, there could be some earnings surprises there. Maybe in some of the commodity names, some of the oil related companies, you could get positive surprises. So there too it is not that stocks have not rallied but you could position yourself on the long side in some of these names going into this earnings season.I think this earning season probably will not be that momentous because if you saw Q1, it was a wishy-washy, hits and misses kind of a quarter and the market probably has priced in the fact that this too will be probably more along the lines of Q1 and it is putting its hopes on second half of the year, which is the January quarter and the April quarter.Even if earnings are not great in Q2, the market will not fall off a cliff because it expects that this is not going to be the rocket quarter but if for some reason the January quarter disappoints, we are in for a de-rating for this market because then we are not going to get double-digit earnings growth. Forget about 16-17 percent -- if Q3 is bad, we are not even getting 10 percent earnings growth for this year and that will be a serious disappointment for the market. So as things stand, this is probably not the most important of quarters in terms of earnings, Q3 probably is where the needle moves quite significantly and the market has already probably moved on to Q3 and Q4 in that sense.