Dec 21, 2012 11:58 AM IST | Source: CNBC-TV18

Beware of heady mkt mood; pick stocks bottom-up: Experts

Anand Tandon, CEO, JRG Securities and Harendra Kumar of Elara Capital advise, on CNBC-TV18, investors to be cautious of the mood of increased optimism oblivious to facts that indicate a sober pace of growth. Technical analyst Sudarshan Sukhani of s2analytics.com recommends investors to stay away from the Nifty which has been in no-trade session

Anand Tandon, CEO, JRG Securities and  Harendra Kumar of Elara Capital advise, on CNBC-TV18, investors to be cautious of the mood of increased optimism oblivious to facts that indicate a sober pace of growth and no decline in either inflation or commodity prices. The experts also suggest investors follow a bottom-up approach while selecting stocks.

Technical analyst Sudarshan Sukhani of s2analytics.com recommends investors to stay away from the Nifty which has been in no-trade session, unable to breakout of the 5920-5850 range.

Below is an edited transcript of Anand Tandon's analysis.

Q: What do you make of the impact of the election results in Gujarat on the Nifty's movement?

A: I don't think there has been an impact. I think the election results were pretty much in line with the exit polls. Though in the morning it did look like the exit polls may have been overoptimistic, but by the time the results were announced, it was clear that it was in line with expectations. I don't think that this is going to change anything dramatically in the near term either for the markets or for the polity in India. So, I wouldn't read too much into what's happening. I think the economy is a lot more interesting at this stage.

Q: The Nifty hasn't been able to see touch that 6,000-mark as yet. What is your outlook going into 2013? Would you be positive about the Nifty reaching new highs?

A: I think the market mood is extremely positive and that is a sign of caution. When 2012 began, the mood was extremely negative and the results show an increase by 25 percent or more up.

I think for the next year we are already factoring-in most of the positives that are likely to happen. But the current market excitement is underpinned by two factors- on the assumption that the commodity prices, especially oil, will come down and the assumption that there will be a slowdown in inflation which will allow the regulator to cutting interest rates. In reality, neither oil prices nor inflation are showing an signs of declining.

So, if either of these two factors were to reduce, the market will be in for a rude shock. Broadly the near-term momentum seems to be positive. Investors in the market could just put a trailing stop loss and trade with it. But the outlook  for next year is a lot more muted than the current year.

Q: Can the market expect reform after the end of the winter session and before the Budget?

A: The Prime Minister has already indicated that the government plans to initiate a rise in power, rail and fuel tariffs. This leads me to believe that it is very unlikely for inflation to actually come down to below-7 percent. If the RBI was to cut rates without the inflation falling below 7 percent, its own creditability will be at stake because it has kind of gone out on a limb saying that it’s their level of comfort. Without that I don’t see the market running away anytime soon.

Q: In your opinion, do you think the over-6,000 levels will be sustainable?

A: I think the probability is very high in favour of the 6,000-level being unsustainable. The expected sustained fall in commodity prices and reduction in interest rates are right now under question.

There is a likelihood the Sensex will actually fall, not rise, because this year there has been single-digit growth and the consensus estimate seems to suggest that growth is to be back at more or less at trendline levels- 17-18 percent growth next year.

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Given the current macro-economic scenario, it looks highly unlikely that this kind of growth rate will happen which means that the market is already pegging in the estimate for next year at a level higher than where it should it be.

Given the current interest rate and the likely outlook for the next year which is at best in my view a 50 basis points cut, I don’t see where the valuation upside can be. International markets also not showing positive signs. I think you may find Italy becoming a big problem very soon, Japan is already signaled that it going to print more money and so is the US.

So, I don't think that we are working in a global environment where emerging markets are going to be a great play next year.

Q: If you think that the market has in some way run ahead of itself, is there a possibility that it is in for a significant downside or does it mean that the upside is not that high and downside perhaps could still be capped at maybe 5400?

A: It really depends on where the reaction starts. Currently the momentum is positive so the best way to trade, it is to stay with the momentum. But if you were to get to a new high and then the market starts a correction, you pretty much should have factored in next year’s earnings which means that if you expect to earn 15-17 percent from the market then atleast that much of a correction has to come in before it can go up again because you end there for the next year as well. So, broadly I think whatever we will see in the next calendar year will be frontloaded.

Q: Where do you stand on metal stocks and the way they have performed over the last maybe a month or so?

A: Metal stocks are looking strong right now. But if you were to look at the fundamentals I think the metal stocks will continue to remain underperformers over the next few months. The underlying demand scenario for the sector also doesn’t look very positive.

Q: Have you considered any of these stock-prices of companies hopeful of receiving a banking licence and have rallied quite a bit of late?

A: I think we will have to wait for the RBI to finally decide who to give the licences to. Various companies have been touted over the years and I would think that the finance sector companies are most likely because I don’t think that it is likely to see too many industrial houses winning those licences now.

Many of the NBFCs have already run up quite considerably and I am not sure that just because they will get banking licences anything immediate will happen. A case in point is L&T Holding which is trading at a valuation which apparently appears to be more expensive than even HDFC Bank. So, whether there is any play left after an NBFC becomes a bank remains to be seen.

Q: What do you think about the aviation sector? There is a sense of vacillation in Etihad in choosing between Kingfisher and Jet.

A: We have already seen Jet run up very considerably on that account. On Kingfisher, unless some  significant cash flow comes in from the existing promoters, I do not think there is any business value. So there is no point speculating about that. Despite foreign investment coming in,m the dynamics of the  aviation industry has not substantially changed, no doubt the fact that lower competition has  allowed current participants to raise prices very considerably.

So maybe some of the companies who  survive may actually make some money now, but there will also see a significant slowdown in traffic  growth because of the fact that it is finally going to start pinching travellers in an environment where the economy is not doing so well.

But on a sustainable basis it will be difficult for airlines to make serious revenues. I think this is a very, very cyclical sector with low entry -barriers
and I do not think that one can get overly bullish on this sector. 

Q: What have you made of the fact that inflows of Rs 17,500 crore have come in December and the markets have not moved at all?

A: We have seen similar amount of disinterest from domestic players as well and  we have to keep in mind that the mutual fund industry in India is struggling as is the retail market in  India. November has been probably one of the worst months for the mutual fund industry when the highest number of folios shut down and for retail brokerages  it has not been that as a great month. I think the excitement about India increases the farther you are  from the country.

Q: Any view with regards to the fiscal cliff negotiations and any sort of effect on  India?

A: Whatever comes out of it is likely to kind of slowdown the US economy for a little while because at the  end of the day it will cause an increase in taxes whch will be set off by increases in benefits to the weaker
sections of the US society. And that will mean that there has to be some curtailment on government expenditure on the economy which is currently struggling to get back on its feet.

So it is not necessarily a good thing. I would expect probably Yen trades coming back into focus because  the Japanese government aims to expand its economy. The issue facing the world today is that every country is trying to devalue to try and grow through export but export  to whom is the question. So unless we quickly find some life on Mars, I think we are still going to be struggling as a world economy for some more months or years to come.

Below is an edited transcript of Harendra Kumar’s analysis

Q: What is your call for 2013? The year 2012 is behind with gains of about 25-30 percent. Are the markets likely to build on those gains in 2013 and therefore consequently it sensible to buy the markets at levels of 5900?

A: Yes. The market set-up looks interesting. Given the build-up of the consensus expectation, there is not much excitement left. But the real opportunities will lie in picking stocks from the bottom-up. That is what most asset or money managers will attempt. But, yes the outlook is positive and with the bottom reached last year, the next year’s outlook is much more positive.

Q: Of the two major events in January- the earning season and the RBI policy- which do you will impact the market the most? Do you think that the market has possibly factored-in a repo rate cut?

A: I think the market’s has been disappointed on expectations that built-up on every policy announcement. I don’t think investors will expect much on a rate cut. It is the earnings that will drive the markets going ahead in 2013.

Q: You spoke about taking a bottom-up approach to finding the real opportunities in the market. So do you see value in a few defensive stocks or in realty stocks which have started doing well?

A: I hold a contrarian view. The early part of next year will continue to be driven by momentum in stocks in the consumption, cement, private banks and pharmaceutical sectors. And this will continue up to March-April. There will some amount of cyclical-bottoms in some stocks closer to June. There will be a shift in portfolio through 2013, but the early months will be driven by stocks that are currently leading the rally.

Q: What is your call on real estate stocks, especially realty stocks based in South India, which have gained quite significantly?

A: Real estate has again turned up to be a bottom-up play. Specific regional-based stocks like Prestige, Sobha and Mumbai-based Godrej Properties seem to be doing really better. I think the market is rewarding stocks benefiting from comfortable leverage and witnessing a pick up in the execution and sales.

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