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There is uncertainty over earnings and that is the single biggest risk for the Indian markets, Sid Khanna, Chairman and Managing Director of India Equity Partners, said. He believes that there could be a 10-20% fall possible for the market in the coming weeks.

He expects to see correction in real estate space.

Excerpts from CNBC-TV18's exclusive interview with Sid Khanna:

Q: What’s your take on the equity environment right now because there is a lot of fear which is visible?

A: I am not particularly surprised as this is certainly a period of global uncertainty which we have seen over the last few months, with events in the US and Europe. There was a considerable theory for a period of time that there was disconnect with India and the other markets. I didn’t believe in it. Some of that connect is coming through and that has combined with some local factors in terms of the uncertainty around the elections. For a considerable period of time, I was of the view that when the oil price normalization started happening there would be deep introspection in terms of industry and buying power. All of this is a period of correction and introspection about what results are going to be like for the next 12 months. I am not at all surprised actually in terms of turbulence that we see in the markets.

Q: We are also one of the worse performing equity markets, at any rate, until now. Are you seeing a specific or focused approach by money funds or money towards India right now? Is it being siphoned out only from India as market or is there generally risk aversion in the air?

A: This is a combination of factors. India was relatively the most expensive emerging market for some of the factors that I pointed out like elections. The oil price subsidy gradually is being removed. People are recognizing that India is going into a period of uncertainty over the next 12-15 months and therefore it is time to be cautious. People are asking whether this strong growth will continue at 9%, will it slip for a year or two to the 6-7% mark? These are questions in the air and therefore it’s time for global investors to be a little bit cautious about the extent of exposure.

Q: We have had 4-5 good years coming into 2008. How long do you think it would take to make the macro adjustments before we can resume the upward trajectory once again in India?

A: Growth is going to continue remain strong. One should not be too negative. In many countries, you are seeing 1-2% growth, so 9% is fantastic. If 9% comes to 7%, then it’s still a very strong showing. India will continue to grow very strongly in the next five years. The real question is going to be whether we going to restart the economic reform, are we really going to have a proper crack at infrastructure, and continue with privatization? Those are some big questions that need rapid resolutions and confidence building. If we can address them over the next 2-3 years, I really see no reason why we wouldn’t go back to the 9% or 10% grit. But if we don’t address them, I would see some slippage in growth rate.

Q: What do you think is the single biggest risk for India as a market? Is it what is happening with commodities globally or with our macros and the state of our fiscal deficit, or do you think its something else in the market or generally markets don’t have quite their eye on it right now?

A: From a market perspective, the single biggest risk today is the uncertainty in terms of where corporate earnings are headed in the next 12 months. One hears very mixed reports as you talk to corporations. Clearly their growths have lowered compared to last year. Are they going to be sharply lower or somewhat lower? As that unravels, you are going to see implications for the market. Over and above that, the macro factors about elections looming and the oil price adjustment will continue to raise a question mark for the next six months at least.

Q: The entire private equity space had kept a very close eye on real estate as an investment opportunity for the last couple of years. Now, that secondary market valuations have collapsed from a private equity perspective, how are you looking at that space?

A: From a real estate perspective, we just had those phenomenal rises going through both on land valuations as well as the uptick in commercial and residential spaces. Some of those valuations had gone considerably out of whack and this is a time for healthy correction. In that state, a large number of people were going out and looking to raise funds at relatively expensive rates from a debt perspective. These are early signs that we are going to see some correction there.

Q: The other pocket or space that got a lot of interest was infrastructure. How would you approach that whole pocket?

A: That whole sector is going to see phenomenal growth. There is a great shortage of power in India which is needed in terms of maintaining growth. A large number of private sector players are very happily coming into the sector, and have very significant expansion plans. Some of the funds which were raised in the sector earlier in the year were at valuations that were probably esoteric and not necessarily connected to market reality.

We are seeing many people now coming back to the market which are at much more realistic valuations. There is more room to go and as those projects get funded, I see very strong growth on the power generation side which will be great for India.

Q: From a market perspective, what is your view? Do you think it will get worse before it gets better here?

A: There is a probability, given the points I made earlier, that a 10-20% correction is still quite possible in the coming weeks.

Source: Moneycontrol.com