A market correction was long overdue: Saurabh Mukherjea


Mumbai: The BSE Sensex partly recovered from a 1,275-point descent on Tuesday, closing 561 points below its previous close. A global stocks crash, return of long-term capital gains tax in shares and budget proposals expected to push up inflation and interest rates are seen as some of the reasons for the ongoing correction.

However, Saurabh Mukherjea, CEO of Ambit Capital, says the Indian market is still overvalued by 15-20%. Until banks start increasing interest rates, domestic investors have few investment options, he said. Edited excerpts from an interview:

What are your initial thoughts on the market crash?

We have been saying this for the past year that the markets are overvalued so much to the extent that markets did not have any correlation or drew parallel with the fundamentals.

So, from that point of view, a market correction was long overdue.

What are the factors that led to the correction? And do you envisage more pain in the future?

Why the markets have corrected is one of the easiest and not required discussions one can have at this moment.

With regards to “Will there be any more correction?”, a 5-6% correction at this point does not bring the market back to its fair value.

The Indian markets are still 15-20% overvalued, but that does not mean that the markets will correct by that much. Markets have stayed overvalued for the past one year and they will remain overvalued for some more time to come. But it is safe to assume that we are still 15-20% away from fair value.

Any learning that we can get from the market crash?

We haven’t seen a proper correction so far, it is just a month of push-back. So, no lesson can be drawn just yet. We need to wait for the dust to settle and the whole thing to play out before we can say that we need to learn from the crash.

Do you think that other asset classes have become more attractive? If yes, then which ones?

This is not just an equity crash but a bigger correction has been in the bond markets. The g-sec (government securities) yields have increased from 6.3% to 7.6-7.7% in six months. So clearly, the bigger correction is in the bond markets. This is the case both in India and abroad and commodities have rallied in the meantime. So, the two biggest financial asset classes have pulled back. But it is difficult to say whether the correction has bottomed out as yet.

Gold historically has a negative correlation with equities; if equity sees a downturn, then gold is a safe harbour asset.

Do you think domestic institutional investors (DIIs) which invested a mere Rs400 crore in Indian equities so far this year, may go slow going ahead as well?

As yet, I do not see any major decision change in domestic investing; going forward, it is not evident where the DIIs will invest or how they will invest. Real estate or bonds do not look particularly reassuring in their prospects. Until the banks start hiking rates, domestic investors have a challenge in terms of sectors where they can invest.

Typically, how much do domestic factors contribute in a rally or a downturn such as this? Is it that domestic factors matter more in a rally, and global factors weigh more in a downturn?

We should not speculate on why markets have corrected or gone up.

Look at the market fundamentally, focus on valuation. Markets were overvalued a week ago, they are still overvalued by 15-20%. Whether the reason for correction is domestic or global is immaterial.

Should the Indian markets move towards defensive sectors?

It is hard to pinpoint a defensive sector, in a broadly over-valued market. But IT and FMCG were trading at fairer levels for most of last year. There are still opportunities in large cap IT stocks and pharma stocks are largely neglected.

So, there are prospects in some large cap pharma stocks that have suffered a beating in the past one year.

There are some CASA- funded banks that are trading at one times their price, decent quality private and public sector banks that one can look at.livemint