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Brace for major correction; real bull run in ’15: KR Bharat

Even though Indian equity benchmarks closed in the red on Tuesday, investors continued cheery pick signaling their confidence in the current bull run. According to Mithil Pradhan of Violet Arc Global Managers 7790-7800 is the ideal trend decider, or like he calls it “make or break level” for the market. “As long as this level is active I don’t think a bear market even in the short-term is going to begin,” he told CNBC-TV18 in an interview.

A correction was long overdue, says KR Bharat, MD, Advent Advisors. “This market has run up way ahead of itself. It has run up because of abundance of public liquidity. Now that abundance of liquidity still continues. So maybe this is not the correction we are talking about; the market was looking for a reason to correct. It got a reason today in terms of the by-election results and therefore it has corrected,” he told the channel.

He feels the real significant correction (read: 7-8 percent cut) will probably come on the back of announcements in the US. “I try to think of: what it is that will stop the flow of liquidity going into equities? (It) is probably an announcement of an increase in rates in the US. Do I think it is likely to happen in the immediate future? No. But you will get an indication very clearly that that event is going to happen sooner rather than later. My guess would be the first quarter of calendar year 2015, latest by the second quarter of calendar 2015, but the indication that that is going to happen will come earlier,” he says.

For now, he says the market will probably try and drift back upwards. But when there is an indication that rates in the US will go up flows into global equities including emerging markets, including India, will get choked for a while, which is probably what will lead to the correction.

That may not necessarily be a bad thing as it will give an opportunity for a lot of people to go long India. Like Bharat explains, the real big bull run in India will probably come sometime in 2015—perhaps second half of the year.

He advises investors to turn a little defensive for the time being. “I probably would be in pharma, IT and autos right now. But post the correction, that we are talking about, whenever that happens, it is time to get aggressive on the growth stocks,” he says.

Below is a verbatim transcript of Bharat’s interview to CNBC-TV18’s Anuj Singhal and Sonia Shenoy

Anuj: Two part question; first is that if you believe that today was just a knee jerk reaction in that case what happens to the midcaps and small cap. Do you think after two or three days of consolidation or a big fall they start to rise again till that big correction takes place and second question, last time when we had rising rate environment in the US we actually had a big bull market in India. Why do you think that would be a catalyst for a big correction?

A: The significant difference between last time and this time is the tapering. What has happened is that with tapering happening I don’t think the US got the sort of impact that it wanted because there has been a lot of US bond buying by the Chinese, which has sort of scuppered a bit of their intentions and strategy and therefore this time when interest rates go up you will see the Chinese perhaps being forced to sell US bonds which will create its own impact and this time you will see flows into equity markets significantly reduced. The only caveat to this is while I am convinced that global equities will see some kind of correction what will happen in India like always will depend on what India does and therefore if one sort of pauses and looks for a second as to where we are yes, inflation is slowing down but there is no visible sign of growth actually taking place here.

Sentiment has changed completely over the last four to five months but the reality on the ground is still pretty much what it was earlier and it is going to take any government at least 9 to 18 months to achieve some kind of turnaround on the Gross Domestic Product (GDP) front. So the difference this time assuming rate hike sort of happens in the first quarter of, say, the next calendar is that the India story will not be as robust as it perhaps will be in the third quarter of 2015.

And secondly the market has already run up significantly. So you need some excuse, some catalyst for a correction what that catalyst will be like I said, I don’t know, it is my suspicion that it will be some kind of action that happens in the US. So while I don’t claim to be a prophet the way I would position myself is to be ready for that correction but like I said, to be nimble so that post correction I can get back on to the bandwagon because I foresee a reasonably long term bull market starting some time towards the middle of the next year.

Sonia: If this is just a short term correction in a longer term bull market then at every point in this correction what should you be looking to buy. You mention defensives but the big movers this year have clearly been the cyclicals. So if we do see the market correct a bit what would be on your shopping list?

A: You are talking about post correction. When I spoke about the defensives I was talking about today. Post correction obviously you are right, if and when there is a correction it will be those cyclical that will correct, it will be those growth stocks that will correct and those will be the stocks that I will be looking to buy post the correction.

The million dollar question is when will the correction happen, how much will it be and that is a decision for each of us individually to take but to answer your question yes, if I had to buy today I would be very defensive but post the correction yes, I would definitely be back in the cyclicals, in the growth oriented stories, in the infrastructure stories because if GDP growth rate were to recover, which I actually foresee happening, those will be the sector that will take the momentum forward.

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