Madhu Kela, Head-Equity Investment, Reliance Mutual Fund, does not see a runaway rally in 2009. “We may see a bit of sell-off post earnings, but won’t see a new low. However, the markets are unlikely to break below October 2008 lows.”

According to him, the upper range for the Nifty is seen at 3700-3800. “The October lows will be the lower range.”

He feels the bottoming-out process has begun. “We are eyeing stock-specific opportunities and are bullish on pharma, and companies which can grow by 15-30%. The media, public sector banking, and sugar space also looks interesting.” Here is a verbatim transcript of the exclusive interview with Madhu Kela on CNBC-TV18. Also see the accompanying video.

Q: What’s your best guess for 2009? How are you mapping it?

A: As we look into the New Year I would like to say that we have three or four maybe little differentiated thoughts:

(1) We believe that 2008 saw tandem reaction in all asset classes in all markets around the world. I think maybe in the second half of 2009 it will start to differentiate so there would be asset classes of the world which will do better than other asset classes, as well as there will be markets in the world which will do other than other markets across the world.

(2) India specific. This is a year which is going to be of stock specific opportunities and sector specific opportunities, so while the world is going to pass through one of its worst recession in 2009, broad market challenges could still exist. But I think there is going to be a lot of differentiation if you are in right stocks and sectors.

(3) We believe that dollar is going to be under a big challenge maybe in the second half of 2009 and that should make non-dollar assets as a big investing theme and all this risk aversion which we have seen in the world may start to at least get that money roll into stocks or countries or specific themes which have longer-term potential.

Q: A lot of money managers seem to be sitting on a bit of cash anticipating an early 2009 sell-off, either earnings led or some other data led, which they would want to capitalize on. Is it your expectation as a fund manager that such an event might come to pass and have you prepared yourself for some kind of an early sell-off?

A: I think we have prepared ourselves because though we have deployed part of our cash, we are still sitting on a decent amount of cash. So, it is entirely possible that post results or during the result season there might be a little bit of sell-off.

However, I don’t belong to that school of thoughts which believe that in January we are going to see a new low in the markets and the Nifty will go to 2,000 or something like that.

Q: What is your own expectation then from January as a month?

A: As I had said last time, the bottoming out process for the markets has begun. We may have seen the worst in terms of broad indices or broad markets and are looking at stocks specific opportunities to invest if the market presents any substantial decline from here.

Q: The other potential red flag people see this year is the election season. How big a problem or issue do you think political developments will be for the market?

A: To my mind, it maybe positive. If you go by the State election results, the third front fear, which was there in the market, may have receded. If there is going to be a new government at the Centre obviously you will expect more policies and a long tenure. On the whole I am looking at that particular thing positively than that being a negative development for the market.

Q: For the market, on the whole for 2009, do you expect to see one of those painful sideways kind of year where the market does not go anywhere, investors accumulate, and don’t make much by way of return? Is that a possibility?

A: That is entirely possible because what we are seeing right now is a lot of cash sitting by the sidelines. A lot of people are going through the pain of underperformance, if they are sitting on an unreasonable amount of cash or have not taken the right bets. If the market goes higher in the short-term, you will see all that money chasing in. But in the interim which is medium- to long-term, the fundamentals will catch up. So, it is entirely possible that we may not have a runaway kind of rally or a runaway kind of bull market in 2009, which we saw in parts of 2007 and 2006. But we are very excited that stock and sector specific opportunities will get presented in 2009.

Q: It’s always a difficult call but if you were to take a broad guess at what kind of range this consolidation will happen in for the Sensex or Nifty, what’s your best guess?

A: You are in a better position to do that. You have been more consistent than I have been.

Q: But when you talk about a consolidation you must have some ballpark. If I ask you what do you think the market will not go above?

A: I think 3,700-3,800 looks difficult because that was a resistance level. In our opinion, that was holding up the market, so that looks like an upper range for 2009-10 and maybe what we saw in October should be the lower range.

Q: You believe that there is a low probability that the market makes fresh lows for itself this year or goes back to October levels?

A: It will entirely depend on how events in the world develop. But as of now as things stand, I would possibly think we may not go below the lows of October, which we saw in 2008.

Q: Much has passed since we last spoke about Satyam. How would you approach the stock now? Just as a supplementary to that, how big a deal do you think corporate governance is going to be this year?

A: As I said, it was not a stock specific catastrophe. Had that gone through, I would have been a very worried man as an investor in India, because that would have set a precedent for lot of people to replicate these kinds of action. So, thank God it has not gone through. I would refrain from talking stock specific on a particular company. But the event was bad. I think it was a bleak event if that had gone through for entire India and corporate governance in India, but it didn’t go through that is good news.

Q: Your thoughts on crude because the call on many sectors indirectly or directly is related to that. What do you think crude will do in 2009 and how are you positioning yourself in many of the commodity sectors including oil and gas?

A: I think there are two parts to this answer. Crude may have made the bottom. We do not think crude is going to trade much lower than USD 30-35 per barrel which we saw, because at this levels a lot of capacities in the world, lot of new exploration, becomes kind of unviable. This is a commodity which is scarce in the world and we must not forget that prices are already down 75% from their peak. So, we do not think crude will trade much lower than USD 30-35 per barrel low which we saw.

In commodities, there could be an interesting case because looking at the way the US has been printing money, there is definitely going to be a threat of the dollar strengthening. Everyone in the world knew that US is going to face some kind of sub-prime crises or some kind of a problem. But that was past 2005-06-07. I think the dollar is in a same position. It is very difficult to make a call as to when that currency weakens. But going by what they have been doing and what they have done I am quite confident that the dollar will weaken significantly over the next 18-24 months. That’s good news for commodities as well as for non-dollar based assets.

Q: As a fund manager without getting into specific stocks, what sectors are you most underweight on and are not betting on at all in 2009?

A: Let me first tell you what I am betting on. We are very positive on the pharmaceutical sector as a whole. We believe that earning growth is going to be at a premium in 2009 and 2010. We believe that visibility of earning growth is going to be at a premium in these years. So, I think the pharmaceutical sector in one sense is a very interesting bet. That sector as a whole has not done anything in the stock market for the last two years. We believe lot of top companies can grow between 15-35% for 2009 and 2010. I see this is being termed as a defensive sector. But if this sector as a whole and a lot of companies are available at market P/E multiple, why this should be a defensive sector if it is going to grow between 15% and 30%? So, we are very positive on pharmaceutical sector as a whole.

Secondly, an interesting play could be media because we have seen significant correction in media stocks. The world over media revenue consolidation happened in top 2-3 players. So, from a long-term perspective media it could become a very interesting story. Last time, I had mentioned public sector banks, nothing new to add there, and maybe sugar could become interesting from here. Basically, we are still studying that sector in depth but sugar could become interesting.

Q: You have seen quite a few of these bear patches in the past for the market. What is your own expectation? How will the midcap space perform this year?

A: I think larger midcaps wherever there is visibility of earnings, managements are good, and companies are well- positioned to take advantage of the opportunity, we will still stick our guns in those companies and continue to increase our exposure.

However, trying untested waters in these difficult times, trying themes or trying only stories which are non-based and based out of earnings are just out of thin air stories, will be best avoided in this troubled time.

Disclosure: It is safe to assume that my clients and I may have an investment interest in the stocks or sectors discussed.

source: Moneycontrol

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