Correction likely, but 2011 lows unlikely: Franklin

Even as the broad trend for the market remains positive, R Sukumar, MD and chief investment officer - Franklin Asian Equities, Franklin Templeton Investments is cautious against the bubbles building up in certain sections of the market where junk stocks have rallied.

He further goes on to say that even though there is a possibility of a correction because of the recent strong rally, the market may not test the lows of 2011 as the risk aversion has abated substantially on a global basis.

Also read: US markets may see bloodbath from tomorrow, says Sushil Kedia

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying videos.

Q: Are you getting a bit cautious around these levels given some of the recent moves in commodity prices etc or do you think we are still in a bullish trend?

A: The broad trend for the market should continue to be pretty positive. As long as the companies can sustain reasonable growth and they can maintain good return on capital, I think there is a reasonable upside to come. However, I should caution against bubbles building up in sections of the market; there are many junk stocks which have gone up on probable false hopes and the expectations have to be reset in some of those counters.

Q: In which pocket do you see this kind of exuberance happening, would it be in names in infrastructure, real estate on which you have appeared a little cautious in the past?

A: Yes, infrastructure, real estate and lot of other poor quality companies where the fundamentals still appears to be very weak and the stock prices have gone up 30-50% as the case might be. Generally, people are buying the mid caps or poor quality companies in many cases hoping that there can be some quick returns coming.

Q: How is the global flow picture looking like from what you hear? Do you think this kind of pace of flows is likely to continue?

A: The fact has been that the equity markets were very attractively valued compared to fixed income market. The risk attributed to equities has been far higher compared to historical averages. So there appears to be a big mispricing there and the reason for the mispricing is extreme risk awareness due to all the sovereign issues and global growth issues. But people are getting used to that. So at some point of time, equities will have to be repriced to reflect the fundamentals.

Q: Do you expect any major correction in the market now given that we have got a lot of events coming up like election results in UP, budget, etc. Do you think any of them potentially could be the catalyst for a correction after the recent rally?

A: There is a possibility of a correction because we had a very strong rally so there can be some unwinding of some of the positions which could lead to some declines. But I do not see the market going back to the 2011 lows because the risk aversion has abated substantially on a global basis. There is more interest in emerging markets and if EMs were to rally, it will be very difficult for India to test 2011 lows.

Q: At what point do you expect retail participation to kick in because so far we have not seen too much by way of retail buying? Mutual funds have seen net outflows over the last couple of months when the market has been so strong.

A: Yes, this is a structural issue. There has to be higher investor education and the distribution mechanism has to get in better shape. So it's a continuous process. So we think it will be a gradual pick up rather than a dramatic one coming in a single year.

Q: What kind of upside do you see from these levels then? Do you think earnings growth will be supportive to further up move in the markets or do you think we have actually traversed quite a bit of ground and you do not see significant upside from here for the rest of the year?

A: We cannot think of the bull markets around 2004-2007, which were more of bubble markets. So we can have significant upsides if you are saying 15-20% upside - those are definitely possible. As the confidence in EMs increases and our inflation is in control and there can be some rate cuts, I think reasonable upsides can be expected.

_PAGEBREAK_

Q: Do you think the election results next week are critical because of the policy PEs or do you think that is not so material for the markets because people have been talking about formations or outcomes which could potentially be favourable from a stock market point of view even on the policy plank?

A: We have to really see the actual implementation on the ground. I don