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Devina Mehra of First Global said the markets are not out of the woods yet. "Global markets correct for 2-3 years after rallies. It is difficult to predict the short-term trend but we are not very positive for the long-term."

According to Mehra, all corporate results haven't been good. "Inflation is impacting margins. A lot of cost push across sectors, will results in margin compression."

Excerpts from CNBC-TV18’s exclusive interview with Devina Mehra:

Q: Is this just a relief rally or are we out of the woods?

A: I don’t think we are out of the woods simply on the weight of evidence. If one looks at the long-term history of practically every market in the world, once you have a good faraway trend compounding level of five years, in 99% of cases we have seen negative return for the next three years. India’s history is about the same. If one looks at 1987-92, where we had more than 50% compounding, we had negative returns for a long-time thereafter. We didn’t take out the 1992 highs for more than eight years. So, the weight of evidence is against us, if one looks at corporate earnings or outlook, it is not that we are going to blow out the lights on that front to justify an above trend compounding or for that matter a far above trend valuation ratio. So, it is extremely unlikely scenario that we would be completely out of it and resume our bull run from hereon.

Q: How much would you give in terms of an upside? We are at 17,000, do you think there is significant headroom left in this pullback then?

A: It’s not meaningful to try and come up with one exact number. The point is that we have to look at what is more likely trend in the medium- to long-term and that doesn’t look very exciting as of now.

Q: Have you seen anything change over the last one-one-and-a-half months either in terms of macros, earnings, or global news flow to sort of suggest that the market might be successful in putting a bottom in place?

A: All news, whatever little has come in the last one-one and half months, has not been positive. Depending on sectors, there has been some negative news on margins rather than on the positive side. If one look at the macro picture, inflation is a cause for worry for number of sectors and that’s in two ways. One is high consumer inflation and that’s not an India specific problem, that’s a problem virtually across the world. That problem is going to get you to a stage where discretionary spends for the household goes down.

Q: The one sector which pulled the market up on Friday was telecom. After a long time we have seen 10% kind of rallies in Bharti. Are you convinced that these stocks can rally substantially after the recent underperformance because you been quite circumspect on the sector overall?

A: The sector has been an underperformer overall. We think it’s an underperformer to a market performer sector. None of this means that you cannot see a trading rally. That’s a different phenomenon altogether. But over a period of time this is a sector which will see a valuation correction. A part of that happened over the last one year. There is some way to go further on that because this is a sector which does have finite growth span. We have studied closely other markets like Russia and China where you saw this kind of subscriber growth at one point and then after a point that does taper off and there has to be a particular way in which one value those. So, that still remains a concern.

What happens with stock like this is that the correction very often happens not necessarily through a price coming down substantially but the price remaining at a point or in a range for a very long period of time. From the mid-90s for about six years we have seen this phenomena in Ranbaxy and HDFC which were very loved stocks at that point in time with very high FII holdings. We did see earnings growth but the stock went nowhere for six-seven years. I don’t know whether the correction here would happen necessarily through price action, the way it happened in real estate. But over a period of time, we see valuations contracting.

Q: What did you make of the numbers in the capital goods sector after looking at BHEL and ABB?

A: I haven’t studied ABB numbers in details but BHEL numbers were quite disappointing. There is some input cost pressure as well, as the competition from international sources is increasing. So, those concerns plus the order book is not quite what it seems. That is why we are investigating more deeply because in case of a slowdown in the economy what happens is that a lot of orders get cancelled.

As far as the power sector is concerned, many times the orders are booked far in advance. There is a tendency to book in orders right at the beginning of a planned period, then they take long time to materializing, and often the planned targets are not met.

Q: What is your expectation from RBI and how are you positioning yourself in banks now?

A: Banking is a sector which we have not liked for the last few months. For the second half of 2007, we did like banks a lot but we think now there are a lot of fundamental changes happening. One is the slowdown in the economy in credit growth. With this whole derivatives issue you will see some problems in particular with banks. You will also see a general slowing down of non-interest income which has been a driver for profitability growth for a number of players. So, those are on one side.

On the interest rate side, we don’t see any softening. RBI is going to be a bit more hawkish because even when the inflation numbers were fairly benign they always had one eye there and they never really made any softening move. In such a scenario as it is today, where inflation is above 7% which is graver concern for RBI and looking at GDP growth rate falling to 7% because inflation is something that affects the common people much more directly, I would expect RBI to be reasonably hawkish.

Source: Moneycontrol.com