Equity and Mutual Fund Markets to See Correction in August

August could see some correction: Yes we are getting close, as market prices go up, the chances of a correction becomes that much more higher because the potential risk either globally or locally remain the same. So to that extent I think we are closer to a correction than ever before. So, our stance has not really changed. We remain cautious given our fundamental view that earnings are significantly lagging behind market prices putting valuations beyond comfort zone or leaving very little margin of safety and as a result we continue to remain cautious.

Is there just too much money in the system which will make the correction when it comes quite shallow? Quite possible. I think we will see any correction happen in more than just one round. As you will see that the cash in the system would mean that the first part of correction will be arrested fairly quickly and you will see a bounce back from that until the next catalyst pulls it down further. So, that is no different from what we have seen in the past and that is likely to be the situation this time as well.

Advice to clients: If you have a mandate that allows you to sit on cash or have other avenues to allocate which I am not in a position to advice on, to that extent, yes, we are advising people to increase cash to the extent their mandate allows. In the extreme case where you have really locked in capital with a longer term view that is where we think that there are still good bets in India even at these valuations if you can afford to take a view beyond the next three to five years.

On FMCG Sector: I think it is a bit too early given the sort of disruption we have seen to the channel, the country, and the economy itself is going through a transformation. It is worth waiting and watching for these disruptions to settle down and see if we can assess the earnings of the sector on a clean slate rather than in the midst of what is a fairly significant transformation. So, while the valuations are coming under question, I would think that people will give the sector benefit of doubt given the structural nature of this growth and the sustainability of long term growth for this sector. So, worth it waiting for another quarter or two before we start bringing down those valuations.

On finance sector: There is still pain to endure on the P&L at least, so we know coverage ratios are the highest so credit cost will remain elevated and earnings will remain distressed but markets tend to act ahead of the recovery. So if at all for the value conscious investor may be corporate banks worth a look if you can endure the pain in the shorter term.

What is your top sector pick? I think consumer discretionary still has some legs in terms of combination of demand, strong brands and distribution for the companies in the sector as well as the underlying shift from unorganised to organised which underpins the longer term growth. So be it autos, or durables, retail, all lend itself pretty strongly in terms of the current economic environment.