From around 13,500 levels on the Sensex, he expects to see levels of about 13,000 before the next leg of the upmove begins.
Excerpts from CNBC-TV18's exclusive interview with Nilesh Shah:
Are you seeing any disturbing signals at all right now which suggest that the market might be about to pause for longer than three-four days, or do you think that it is just that routine consolidation that we have been seeing periodically in that journey from June onwards?
I think broadly, the way the markets have been moving, over the last four-five months we have seen this market gain about 50 per cent ever since that level of 9,000 to about 13,500. We have clearly seen a straight move of about 50 per cent.
We have had intermittent corrections in this entire journey and clearly our sense is that we are probably going to see one more intermittent correction once again in the market place, which might be to the magnitude of around 5-6 per cent.
Probably from 13,500, we will see the levels of about 13,000 before the next leg of the upmove begins. I think the first correction always looks very healthy, and this correction will probably be a healthier one.
You are clearly seeing far more of a correction happening in that midcap/ smallcap space, where probably some of the leverage positions are coming off.
A lot of the strong upmoves that we have seen, particularly in the realty sector, is really giving us a sense that some gains are getting given off out there. So again probably some kind of reality check is happening in that segment. And once you have this correction - which could last anywhere between three-five sessions, we will probably see again some amount of action coming back into the market place.
Do you think that the market is heavy at this point because there has been some pick up in the F&O positions and in the leverage? Don't you think that this could be one more of those corrections, which starts with 200-300 points, but become bigger?
No, I think there is no doubt about the fact that the market is definitely a lot heavier than what it was months back or maybe a quarter back. There are three or four indications, which clearly suggest that - firstly, if you look at the overall positions in the F&O market, it is at about Rs 51,000 (Rs 510 billion) odd crore compared to about Rs 54,000 crore (Rs 540 billion) in the peak sometime in April and May.
The second thing is clearly the leverage position. By and large the margin book of a lot of the brokerage houses is at levels where it was in April and May. Thirdly, you saw a couple of successful NFOs happening from the mutual fund industry, which have received some good response. And fourth is the response which some of the NFOs have received - we have had some really blockbuster NFOs happening in terms of the response where IPOs got oversubscribed anywhere between 40-50 times.
Purely, all these are signals, which clearly indicate that the markets are a lot heavier than they were. But I do not think that it is so heavy that it would lead to some very big corrections in the broader market. As I said, probably that correction may not be more than 5-7 per cent.
A lot of energy is spent nowadays trying to game how this next three months will pan out because this has traditionally been a sweet spot for our markets. One theory is that you will recoil a little bit and then rally on close to the end of the year through to the start of the year and maybe go back to 14000 plus levels. Is that a theory, which appeals to you?
That theory has a much higher conviction because historically this has really been the best part of the year. Also, this is the period when investors start beginning to factor in earnings which are going to pan out over the next 12-18 months horizon.
So clearly from FY07, the focus starts shifting to FY08. Over the last six months, a lot of the global investors have participated, but probably their level of participation has not been as high as what they would have probably wanted it to be. I think as we rollover into the next year, one will probably see investors allocate a much higher share to India compared to what they have been doing in the past.
So that probably could be an important trigger for this market. In addition to that, you might also see some more NFOs coming or more IPOs coming out from local mutual funds and that too might provide the added liquidity, which this market may be looking forward to.
Do you think real estate stocks have gotten to that overheated valuation stage or do you still believe in the valuations?
In real estate, the valuations have always continued to be an enigma. We have probably reached a stage where companies are getting valued at multiples to the land banks rather than saying the land bank is clearly the NAV and therefore you really buy.
Having said that, if you look at the entire real estate pack, there has been some kind of a significant increase in the momentum of lot of stocks more particularly over the last fortnight or so or maybe over the last 3-4 weeks.
It is time for some of these stocks to consolidate and cool off a little. But there is a very large set of investors buying the paradigm that real estate stocks, in terms of market cap, still represent a very small portion of GDP. Compared to a lot of other markets where the real estate as a percentage of the overall market cap is as high as 10-20 per cent, in India it is still about 2-3 per cent, and therefore you probably still see a significant scope for appreciation.
So I clearly think that the momentum is on the side of real estate stocks, and there is a limited amount of floating stocks out there. Once you have more and more IPOs happening in this space, the momentum in that space probably might come down.
After a small correction happening, you will still see the uptrend continue to move up. As far as the entire midcap space is concerned, over the last twelve months, the leadership has been with the real estate pack. For the next 3-4 quarters atleast, you clearly see the leadership continue to be with this entire pack.
There is a feeling that private banks have probably run their valuation course. Where do you stand on that space - private and public sector banks?
Based on the run up which a lot of the private sectors banks have had over the last two-three months, the valuations in the near-term look overstretched. Having said that, we believe that as the sector will probably be among the biggest beneficiaries of the economic boom which India is going to witness, and to us the entire concept of Universal banking and the BFSI space has been very relevant.
We would continue to want to be relatively more overweight on the private sector pack but there is a lot of value available in the public sector banks. From that perspective, we continue to play a combination of both the private sector and the public sector banks.
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