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Fair value of market 5-10% below current levels: ICICI Pru

‘Turbulent’ is the best term to define the state of the markets currently. But an unperturbed Nilesh Shah of ICICI Prudential tells CNBC-TV18’s Udayan Mukherjee that the indices are not as leveraged as in 2008. “There is enough cash waiting to be deployed into India,” he says.

Talking about his flavoured investment pick—banks, he says, the microfinance institution exposure cannot majorly affect the banking sector. “The space has seen a correction for sure, but it is due to the sharp run up earlier,” he explains.

Below is a verbatim transcript of the interview. Also watch the accompanying video.

Q: What is your sense of what these Korean crises or Korean news flow could do for our markets. Do you think that panic has blown over or could it have implications on liquidity?

A: I think the only reason which we need to worry about is that is there a risk aversion in foreign institutional investors (FIIs). A large portion of India equity markets in recent times is driven by FII flows. FII flows, on a longer-term basis, are bound to come into emerging market like India because of the growth potential, but in the near-term they can be impacted by the risk aversion.

Now suddenly over last couple of days, we are seeing events, which could increase risk aversion like the skirmish at the Korean border, the potential rate hike action in China, which could result into slowdown of global growth, like the European debt situation, which can again raise some shadow over market's risk appetite. On top of that you also have some domestic news headlines which could unnerve an investor.

So put all these together, you are seeing an impact onto the FII risk appetite or the perception of investors that it can impact FIIs’ risk appetite, which is why our market are correcting.

Q: So far we haven’t seen too much by way of actual selling or outflow from FIIs. So is it more a matter of perception that it might happen or you are actually from speaking to some of your offshore sources gets the sense that the time the year is out there could be some outflows?

A: The reason why the markets have corrected even though there is not that kind of selling by FII is because some players in the market may have the perception that these events could result in lowering of risk appetite and the it could even result in lack of flows or outflows. It’s the perception that’s driving the prices rather than the real action, the second thing, is that at current level of valuation and before that, India was trading at premium to its peer group. India was trading at premium to its own historical average, which is where there was probably need for either a time correction or a price correction so that price and fundamentals can catch-up.

All these events have acted as catalyst for Indian fundamental to catch-up with Indian prices and from here on, I doubt if there will chances of crash or a correction like what we saw in 2008. We are certainly not heading for 2008 kind of correction or crash. The fundamentals are strong. The valuations are reasonable. They are not as excessive as 2008. There is limited leverage in the market unlike in 2008, and global events while they have been on downside for last few days, they are nowhere near what were prevailing in second half of 2008. So keeping those factors in mind the correction will be there but no crash for Indian equity markets.

Q: So you would say that you would be surprised if the market took a big corrective swing from hereon, after the 7-8% correction we have seen already?

A: I will be surprised if there is bigger correction than that because I believe still there is enough cash waiting to be invested in India and unless and until something fundamentally changes the growth equation in India I don’t see that kind of correction happening. The events will have to occur which are not perceivable in today’s mind set for markets to correct beyond that. In some sense the fair value of the market is probably 5-10% below current level, not beyond that.

Q: How are you mapping the market over the next six-12 months? How do you think it will play out the Nifty’s journey through the next two-four quarters?

A: If we take a slightly six months kind of view, on the one side markets are going to get capped by the valuation concern which has receded a lot, but we are still at premium end of valuations vis-à-vis peer group. Earlier we were having a wide gap, now we are having a small gap.

Second, it will be impacted by the supply of paper coming in. in the first six months of FY2011, what supply we have received, vis-à-vis what we are going to receive in second half of FY2011. It’s going to be three-five times more and hence supply will cap the market.

On the other hand, markets have limited downside because valuations doesn’t look excessive, leverage, doesn’t look that excessive and at lower levels the world has enough money to invest in growth market like India.

We are probably somewhere in a situation where markets are likely to remain range bound, unlikely to move in a significant manner either way. It will create a consolidation and then depending upon liquidity or results we can start moving in other direction.

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