Eye HUL, HDFC, Infosys than midcaps, smallcaps: Bowen Cap

Aadil Ebrahim, Investment Manager at Bowen Capital Management said that the Indian market has outperformed the rest of the other Asian markets because of their (Asian markets') correlation to crude and if crude falls to USD 100 per barrel, India will outperform. One can move into stocks like HDFC, Infosys or Hindustan Unilever, Aadil feels. “These stocks will give much better gains from a risk-reward perspective than trying to play out of smallcap or a midcap,” he added.            

Excerpts from CNBC-TV18’s exclusive interview with Aadil Ebrahim:

Q: What’s your sense - is there a lack of conviction between the bull and the bears currently? Does it all boil down to where crude goes, whether it breaks below USD 110-120 per barrel mark? While crude remains in that range, is that the similar case for equities?

A: There seems to be no direction whatsoever. We advice short-term investors to just stay out for now, because crude bounces USD 4-5 per barrel when the market sells off. When there is a storm approaching, the markets get very jittery. The bank write-offs are still continuing and one needs to see the stability in the US banking sector even though a lot of sectors around Asia are uncorrelated - that is what started the whole market sell off in January-February and until that ends and clears off, one would not see some stability returning to this part of the world.         

Q: The talk in the market was that when the commodity prices start to come down one will see fall in markets like Brazil and Russia and also rise in India and China. We have seen Brazil and Russia falling. It hasn’t been matched by increase in Indian and Chinese markets. What do you think has been the major reason for this?

A: One needs to see probably 20-25% fall in commodities to get oil back down to USD 80-90 per barrel where it was at the beginning of this year. We have seen the run-up to USD 140 per barrel that has crashed the market, and with oil staying at USD 115 per barrel possibly going to USD 120-125 per barrel, if the storm turns out to be as bad as Hurricane Katrina - that still does not give us the comfort levels. But at least the Indian market has outperformed rest of the other Asian markets because of their correlation to crude and if crude falls to USD 100 per barrel, India will outperform. However, one will not see significant returns because one still has not hit peak interest rates and the banking financials crises in US have not rectified. Also, the strength of the USD will result in lower commodity prices. But the last four-five years have been fantastic for Asian equities because of the weakness in the USD. What happens now if the USD strengthens and stays strong for the next couple of years – would we have strong Asian markets? That question is still not fully answered and we remain sceptical of the strong USD - this part of the world can outperform the United States.      

Q: In about a month and a half back, we have rallied from 3,800 levels to 4,600 levels. The premium which we had - MSCI (Morgan Stanley Capital International) Asia Pacific Index had significantly narrowed and when we hit that premium, we were down back to 4,300 levels. What is your sense currently? We oscillate while the rest of Asia catches up or do we have some catching up to do on the downside now?

A: If crude spikes up, sentiment in the market will not be back down to 4,000 levels. However, the good sense is that the peak interest rate scenario is approaching sooner rather than later and when the RBI (Reserve Bank of India) commits, one is looking at least another 25-50 bps hike. If commodity prices stay where they are, we should be down 25-50 bps. This will hold India together, and for long-term investors, it creates a perfect opportunity to pick up some of the real estate sensitive stocks that are down 50-60% because over the next two-three years one will probably make returns. So one should start picking up bits and pieces of ICICI Bank, some of the big real estate stocks that have been hammered, and one will probably look good in the next couple of years.

Q: You speak to a lot of fund managers as well - (a) what is the sense you are getting currently. Have some of those concerns eased or is the fiscal and inflation problem which we sort combating still looming large (b) ould Unitech and DLF, the stocks you mentioned, be your current conviction buys on India and stocks you particularly like?

A: Most of the investment community is concerned about the inflation here. The 12-13% is very worrying when one is looking at a target range of 5-6%, which is double than that. Some markets like Vietnam and Pakistan have gone significantly high and their markets have fallen as a result. For example, China’s inflation rate peaked out about 8-8.5% and India has gone further than that. So people are concerned; the RBI was late in terms of trying to slowdown liquidity but they are now stepping it up. People globally are also concerned with the strength of the dollar and should be moving assets out to emerging markets. As a long-term investor one should start nibbling at the DLF and Unitech because they will be the largest real estate companies in India over the next five-ten years.

However, one should not invest all assets into those stocks right now, maybe take 15-20% of the intended allocation and move into those names say in HDFC, Infosys or Hindustan Unilever - these stocks will give much better gains from a risk-reward perspective than trying to play out of smallcap or a midcap.