Gaurav Doshi, VP - PMS, Morgan Stanley PWM expects market to close flat to positive in the month of December. However, he says there is a stronger possibility that the action will get narrowed towards cyclical stocks in the broader midcap market.
"In the second half of this month, you will see FII and institutional activity diminish purely because of seasonal factors such as Christmas and holidays. So I would think that you will have more domestic movement that will drive markets, which will restrict movement to a fewer sectors and the broader midcap market," he told CNBC-TV18 in an interview.
"I would say that rather than look at the broader Nifty right now I think there are much more and better opportunities in individual stocks and sectors," Doshi says.
Below is an edited transcript of Doshi's interview on CNBC-TV18.
Q: What is your sense of what lies ahead for the rest of December given the kind of political and global cues that you are expecting?
A: There is a strong possibility that you will get a flat to positive close at least in the month of December. Liquidity has been good, and more importantly, historically, December is a month when equity markets tend to give positive returns. In the last 20 years, you only had four times where the month of December has not given mildly positive to strongly positive returns. So I would say the odds are stacked in favour of the market continuing with this momentum—maybe not at the same pace but in the same direction towards the end of this month.
Having said that, I think there is a stronger possibility the action will get narrowed towards cyclical stocks in the broader midcap markets because towards the second half of this month, you will see FII and institutional activity diminish purely because of seasonal factors such as Christmas and holidays. So I would think that you will have more domestic movement that will drive markets, which will restrict movement to a fewer sectors and the broader midcap market.
Q: Would you say the best for the index is behind it or do we still have a shorter closing this year up at 6000?
A: To put a number right now is anyone’s guess; but the momentum is there. I think 6000 is within the reach. There are talks of 6100, 6200, 6300—whether it is in December or in January is going to be a hard call to take. I think what happens politically with regards to the reforms on National Investment Board (NIB) etc, will determine whether we get that extra 100 points odd on the Nifty or not. But I would say that rather than look at the broader Nifty right now I think there are much more and better opportunities in individual stocks and sectors.
Q: What are your expectations from Parliament and policy through the next couple of weeks?
A: Expectations are obviously there. Everyone is hopeful. You can see that on the prices in the screen. Everyone is hopeful not only about policy, but even eventually from the RBI. But I think what is more important then is the pace at which these reforms progress. While we know the intention is good and the ramifications of these policy actions will be extremely positive, what is really critical is that the pace at which these policies progress and these reforms materialize. Having said that I think sentimentally what we are seeing with regards to Foreign direct investment (FDI) is a step in the right direction, but with regards to Goods and Services Tax (GST), NIB we need to see more concrete and faster paced action and if that plays out then we will definitely see some sort of valid sector rotation taking place which in turn will provide a sustainable base for the market to build a higher base on.
Q: What are you picking up about money? That has been spectacular, but we hear most of it is ETF routed. Is there more coming? Is this country specific? What do you hear?
A: Our feedback from investors in the region has been that while India has seen a lot of money, most investors still tend to be either underweight or equal weight India. There are a lot of people that possibly could go overweight, but I think what we really need to keep in mind is what has happened in China in the last two or three days.
The development in China has really woken up a lot of investors in the markets. We have seen almost the fourth highest volume day in China yesterday, almost 13 odd companies announcing buybacks; 30 companies on the index hitting upper circuit. So China has made a significant move and like Udayan was mentioning earlier I think with regards to flows this could be one big threat for India that all of a sudden China starts to look much more attractive than India on a relative basis. We all know that the pace at which China can implement reforms, pass reforms and give more dynamic reassurance to investors given the sort of political environment there has the potential to make China the current favourite and takeover India’s position.
For the next three odd weeks, in December, I do not expect any big change in terms of the direction of flows. In the last 10 years, if you see we typically tend to see some FII selling in first two to three weeks of January, so I would expect that trend to continue and if China starts to relatively outperform India I guess it makes for a stronger case for those relative tactical profit booking trades out of India and maybe reallocation to China.
Q: What are your big bets for 2013? How are you tactically tailoring your portfolio now?
A: This year has been about quality and liquidity. You have had first of year where quality performed and you have had the second half of the year where liquidity has literally lifted all boats. But I think next year is more going to be driven by earnings troughing and the fact that we will see incrementally earnings improve over the next three or four quarters. So if we actually get reform and some sort of policy action by the government, in our opinion, cyclicals is where you want to be and where you want your portfolio to be skewed towards.
You want to have cyclicals, you want to have midcaps because that is really where the value still remains and that is really where the upside potential kind of exists. Defensives do not offer that value opportunity anymore and I just think that if something like the NIB comes through only then does that really open the window for investors to revisit sectors like infra, capital goods, cement etc. Because until we do not see ground reality changing our interaction with the private individuals or promoters of companies in the infrastructure space their view still remains that all we are doing is focusing on our current projects.
We are not looking to bid for anything more. We do not have visibility and clarity and we are not willing to back all this hope with money. So what we need to see is faster progress on policy. We need to see faster ground reality and therefore I think infrastructure, cyclicals, midcaps is what you want to have your portfolio skewed towards if you want to catch the upside on 2013.
Q: Are you buying real estate though?
A: As a house we have a positive view on real estate, but I think it has to be a very, very stock specific call that you take. You cannot really play a blanket trade across the sector. There are companies that have kind of been in pain for the last two years, but have taken a lot of hard measures to come out of the debt trap that they were in. We have seen individual pockets like Bombay and Bangalore where companies have managed to improve financials, reduce debt and are also seeing a significant increase in sales.
So I would say with real estate we are taking a very stock specific call and not a blanket trade across the sector and companies where we are seeing active debt reduction, companies where we are seeing visibility in terms of sales and companies where we are seeing that there is not too much of a land bank play but more the fact that the land bank is monetizable. I think it is these prior factors that are reducing maybe two or three stocks within the sector that we would like to play.
Q: You were talking about China earlier. What could it mean for the beaten down metals complex? Do you see any ray of hope for them in 2013?
A: That is very interesting. Yesterday one of my regional traders sent an e-mail after China’s move with subject line that ‘Does China lift all boats?’ and while relatively it may steal a lot of FII flow and allocation from a market like India, but on a bigger scale if the sleeping giant like China starts to wake up and starts to perform and let us not forget that whenever a new political regime takes over you typically tend to see a lot of the worst data and stuff come out and then from thereon over the next 3-5 years you tend to see an incremental improvement. So if China does kind of follow-through in this move there is a very strong perception at least in the regional markets that along with it you will see a revival in the commodity prices and you will see a revival in commodity based stocks.
Having said that I think in general the perception on underlying commodities will turn positive if China continues to maintain its momentum and having said that I think on a stock specific basis one has to look at metals, because each metal company also has issues whether it is with mines, whether it is with debt. So look at something that is a pure proxy on steel or aluminium prices.
But given the beaten down valuations they are trading at, given the huge underperformance metal stocks have versus the broader market specially in the last three months, given that they have value purely on a valuation basis and a lot of them have visibility over next three-four quarters in terms of how they are reducing debt I think metal stocks definitely do look like interesting plays.