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C Jayaram of Kotak Mahindra Bank said the market is likely to see an uptick in January-February. "More money is likely to come in. We may not see an 8-10% upside leading up to the Budget. We will see selling pressure coming in at every rise."

Jayaram sees a stronger correlation between FII flows and movement of largecaps. "We may see more gains in largecaps if more FII money comes in."

According to Jayaram, earnings may not disappoint but will not be a big trigger. "We will see some pre-Budget euphoria on policy expectations. See fair amount of retail money coming into equities."

Excerpts from CNBC-TV18’s exclusive interview with C Jayaram:

Q: How are you feeling about January, now after seeing the first week performance?

A: Pretty good and I always felt that there would be a sort of uptick in the first month. As many of the large investors come back to look at markets, India still looks better than most others around the world. To that extent, we will see, at least in early stages like January-February, a fair amount of money coming into the markets.

Q: Do you think that is what is getting reflected in the largecap performance for the day today, because they have been much more subdued than their midcap peers?

A: I think so. Clearly, there is a much stronger correlation between flows of foreign money and the largecaps. Typically, many of these investors, when they decide to make entries typically do it on the back of largecaps. So, that is probably a trend, which you would probably see, in the first month of the year, assuming that markets do hold out.

Q: What is the biggest trigger in the next couple of months? Is it liquidity flows, pre-budget sentiment or is it going to be earnings?

A: There is a bunch of things. I do not think earnings can really be a trigger. My sense is that earnings certainly won’t disappoint. But people expect that earnings would be on certain lines and that will be met by most large corporates. So, I do not think that can really be a trigger for any move.

There will be some set of pre-Budget euphoria. We are in a pre-election year or maybe even election year, depending on how things go. So, clearly expectations are that there would be some element of populism in the Budget. I think those will start to get factored into the markets, as we get closer to the Budget. The interesting thing is that we talk a lot about foreign flows.

The big change that has actually happened is domestic liquidity, there is a fair amount of money coming into equities. You can actually see that in terms of the new fund offers that MFs have done in recent times. So, there is a fair amount of retail money, which is quite happy to go into equities.

You would argue that within that, there are two elements. There is money, which is coming in on the back of money already made in the markets, by high net worth investors. There is also fresh retail money coming in at levels, which they should be thinking a little more about. But net-net, there is a fair amount of equity appetite in the domestic markets right now. That is also starting to get reflected in the market movements.

Q: Can you build a case for a substantial upside in the next couple of months, till the budget is done- 8-10% from these levels?

A: I would probably think not, because at another level, whenever you see some sort of rise in the markets, there are sellers coming in, particularly larger foreign institutions, etc, which believe that in many of the stocks valuations are a concern. So, you are going to see some selling pressure coming at every rise in the market. That is why I don’t expect markets to run away from here.

Q: How would you position yourself? The excitement is on account of this IPO. But a lot of people have been saying there is froth in this sector. What is the prudent way to position yourself in this sector in 2008?

A: Clearly, it is being looked at as part of the broader infrastructure story. That still seems to be the strongest macro theme in the Indian market. My belief is that through 2008, factoring in what valuations they are at, as a sector infrastructure will still continue to be pretty exciting. The belief is that it is the sort of space which is going to merit a lot of attention and where there is likely to be a lot of action during 2008.

Q: Do you see this kind of events, the supply of paper which is coming from this sector, continuing and these triggers continuing to drive valuations even higher? Do you think there is a lot of excess building up here?

A: Obviously, we are seeing a structural bull market for a period of time. You can always argue that during bull markets, there will always be excesses. The question is whether those excesses are coming out in the form of excitement around IPOs and other stocks in the same space getting re-rated. The answer is probably yes. But I would just argue that when you are in a structural bull market, some of these are sort of things that go along with a market like that. Hence, the real call which investors have to make is how far will this bull market go and what is a good time to exit the market.

Q: What is your sense of how to play oil from here? Crude is at USD 100/bbl. We have seen a good rally in not only upstream companies, like ONGC and Cairn, but even downstream, like HPCL and BPCL. What is the best way to approach this sector now?

A: It is the most difficult sector in Indian context because everything is tied in with what garment policy is at any point of time, in terms of subsidies, how much do they want to pass on and how much do they want the downstream companies to pick up as subsidies. So, the only thing is that many of those companies are in such poor shape now. So, to my mind from here, there is very little downside on many of those.

Source: Moneycontrol.com