Mkts may head higher by Dec: Bowen Cap Mgmt

Aadil Ebrahim, Investment Manager, Bowen Capital Management is confident that over 3-6 months, the market should be higher than where they are right now.

He told CNBC-TV18 that the stock to pickup at these levels is Infosys. “The market sell off was completely unwarranted. A lot of the sell side community was expecting the company to raise the US dollar guidance. That was clearly not going to happen. With 60% of their sales from the US and 35% from banking and financial sector, there was no way they would raise the guidance.”

He further added that investors should go with a clear leader that has a broad-based strategy and the management to execute on that and Infosys clearly stands out over the rest.

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

Q: The biggest problem that seems to confront all equity markets is the kind of expected problems in the financial sector in the US. How bad can it get? Are you expecting some kind of a capitulation or imploding of any financial institution in that country? What will it mean to the emerging market equities?

A: When you had the whole Bear Sterns fallout, you had a pretty decent bear market rally after that because the US came and saved the bank. With Fannie Mae and Freddie over the weekend, Henry Paulson came out and gave them a sort of explicit guarantee. Surprisingly, the markets did not react to that yesterday.

The US opened up about 100 points and then steadily fell throughout the day as no one quite believed that someone is going to guarantee the equity.

There is probably a lot of negativity out there. I don’t think one will see a rally that we saw after the Bear Sterns fallout.

Q: What will the impact on the emerging market equities? Do you see some kind of risk aversion creeping in?

A: There are some economies in Asia that will obviously suffer greater fallout then some other economies. China, for example, will report slower growth on the back of a slowdown of the US economy. It is the same with Taiwan, which relies on a lot of their technology exports.

It is the same with Korea and Japan. With India, it is a bit different because India’s market economy is not as much correlated to the US as some of the other economies.

With India it is down to commodity and oil prices that is weighing down the market and now that sort of plays back to the weakening of the US dollar.

So, one needs India to pickup the strengthening of the US dollar, which will only happen when the banking or the financial crisis blows over and things start to pickup.

Q: As an investment, how are you looking at your portfolio right now in terms of bifurcating it between equities, debt and other asset classes? What is the call on the cash levels that you are holding right now and when do you seek to deploy them?

A: We have steadily started adding to our portfolios for the last couple of weeks as we felt the markets have sold off 30-35%.  India is down 40% in US dollar terms. We may not be right over the next couple of weeks.  But we are fairly confident that over a 3-6 months time horizon, the market should be higher than where they are right now.

The question is will there be a few more weeks of pain. We are willing to deal with that as long as one takes a longer-term view and expect the markets to pickup.

Q: Are you picking up an India as well? What sectors or stocks are you looking at?

A: The one stock to pickup at these levels is Infosys. The market sell off was completely unwarranted. A lot of the sell side community was expecting the company to raise the US dollar guidance. That was clearly not going to happen. With 60% of their sales from the US and 35% from banking and financial sector, there was no way they would raise the guidance.

One would want to invest in companies that can grow 20-25% over different economic cycles. These would be the companies that will come back a lot faster. Some of the banking and real estate stocks that have absolutely been pummeled will take a lot longer to recover as the interest rate scenario sort of plays itself out.

Q: Are you only picking Infosys or the other IT majors as well in India?

A: No, we are picking the best and they will clearly outperform a lot of other companies. In some of midsize companies like HCL Tech, we are always worried about their aggressive hedging policy and that what was played out in the last couple of days.

One would want to go with a clear leader that has a broad-based strategy and has the management to execute on that and Infosys clearly stands out over the rest.

Q: In the entire emerging market’s basket, where are you deploying the cash most now? Where would India be in the pecking order?             

A: Our India allocation is probably running about 15-20%. We have cut it down from 25-30%. My best bet is that over the next couple months, the Chinese inflation numbers will start to trickle down because of a much higher base effect. As that inflation starts to come off, the Chinese markets should start to outperform.

When the Shanghai market is down 50-55%, the Hang Seng is down 25-27%, that should pick-up faster than the other emerging markets. Markets like India are probably a couple of months behind because one doesn’t have the base effect on inflation. China has been a lot better in terms of containing the commodity inflation than the Indian market.