China is a beast no one understands; hold your cash: Udayan

The China phenomenon is quite impossible to analyze and one should not rush out to buy imagining the world would straighten out in a few days, warns Udayan Mukherjee. The market is in complete flux right now and one should be watchful of sudden sharp rallies.He says India stands out as a relative outperformer, but if China becomes a problem whose magnitude is yet unknown, "then this outperformance will not be of any consolation."If one must buy, then top notch housing finance names and blue chip private banking companies can be bought in small quantities, he advised.Below is the transcript of Udayan Mukherjee's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: So much of gyrations in the market especially even in a huge mature market like Wall Street, how does all this pan out, do the markets take a very long time to heal after such huge whipsawing moves?A: My sense is that one should not try and analyse the global situation too much at this point in time. I have seen in the last couple of days everybody has taken a potshot at trying to analyse what the global situation is like. But believe me, nobody knows what is going to happen from hereon.So you should not break your head trying to analyse China. China is a Black Box as we all know and it is not Lehman Brothers. People are saying this is not 2008, sure it is not. It could be worse than 2008 because then one single company brought the world to its knees, now we are talking about such a giant economy which is in serious trouble. My sense is that this is the problem that you cannot wrap your head around so easily, particularly sitting in India. So you shouldn’t spend too much effort trying to do that.If you are a long-term investor wanting to buy these dips, better focus on individual companies which you have a much better chance to analyse accurately. (That's better) than trying to figure out the global problem.I think the global problem is of a magnitude and of a nature that will only unravel itself over the next few days/weeks. Right now we are in a bit of a flux. Generally buying in a flux is not such a great idea. I know a lot of brokerages are coming out with their lists after the big fall saying we should buy this and that. But I would sit on my money right now and just see how things pan out because we are in a zone of confusion and uncertainty globally. Nobody in the world quite knows how this cookie is going to crumble. At times of such uncertainty, whether you are bullish or bearish, it is best to keep any kind of predisposition aside and sit on your money and see how things pan out over the next few weeks.Sonia: When you say sit on money, does it mean not putting in fresh money or does it mean even redeeming some of the stocks in which perhaps you have made a good amount of money in the last one year?A: It is difficult to hand out any kind of trading advice because this is very unlike the corrections we have seen earlier in the year. We have seen corrections of 300-500 points on the Nifty and they have been for reasons which could be analysed. Suddenly we are presented with a beast which can be a game changer. None of us know whether this could just end up being a Nifty correction to 7,600-7,800, which on hindsight could reveal as a buying opportunity. The markets might spend a lot of time digesting or licking its wounds but then over a period of time, it will work its way upwards once again following that uptrend which has been in place for the last couple of years. Or this could be the start of something more ominous.Right now what you are hearing from people is basically predisposition. The bullish (investors) will tell you to buy this dip as nothing has changed and India is in a great macro position. The bears will say this is the big breakdown the world was waiting for the last three years and all hell is going to break loose from hereon. However, that is not an insight into the problem. That is basically whether you are bullish or bearish and you are laying out your prediction based on that.I think that is not an accurate kind of hypothesis to go with. So my submission is — and it is not a very helpful one I will say at this point in time —  that at the first cut you should not rush out to implement a strategy. Give it a little bit of time. This market is not going to run away; that much is clear. We are not going to 9,100 day after tomorrow, I think that all of us understand that. So when there is no rush, I think you need to just calm down a little bit, not trade every day, not try and catch every short covering bounce or short every rally. This might be slightly bigger than what we have got used to over the last six-nine months. I hope it is a transient phase. So far we have no evidence that the bull market has turned but I think it would be prudent to give it a few days to figure out how big this problem is._PAGEBREAK_Latha: Would you say that you don’t buy only in this period any stocks at all or do you think that if opportunities are there in stocks which you have studied, which you have analysed -- for instance in pharmaceuticals, it would be a good idea to deploy some money there?A: The answer to the first part of your question may well be yes. There is turmoil, a lot of prices have corrected significantly. If you are confident about some of the stories that you have analysed closely, there is no harm in going out and buying in small doses.The problem is in the second part of your question. Have stock prices corrected enough? I would say the important thing that investor should keep in mind right now is to look at stock prices not just in reference to their recent highs — because that is the mistake people end up making after a fall of this magnitude. They will say this stock was Rs 800 and it is suddenly below Rs 700 and therefore I must buy it. You must ask yourself another question — is there considerable uncertainty in the global space right now? The answer to that may well be yes. So if you are buying something, would you want a little bit of safety under your belt in terms of valuations before you go out and buy or just buy because the stock price has corrected 10 percent from what was a fairly lofty valuation level?You mentioned pharmaceuticals, I think there are some excellent bets out there but the recent rally in pharmaceuticals before the crash happened had taken many of these pharmaceutical stocks to very high valuation levels. So they may have corrected 10 percent but they have corrected from 28 price to earnings (P/E) multiple to 25-26 P/E multiple; and that kind of a valuation multiple in the context of the kind of global uncertainty we sit on, could be a very expensive price to pay. So I would say by all means go out and buy businesses that you want to buy or have wanted to buy but at this point don’t make the mistake of paying very aggressive valuations because the context or the platform in which you are operating might have shifted somewhat from what it was a couple of weeks back.Sonia: In a phase like this, is it better to look to buy the largecaps and avoid midcaps because, generally in the past we have seen at turbulent times like this, the midcaps tend to be a very treacherous space?A: You have to stick with quality at this point in time — largecap or midcap. You cannot be going out and buying dangerous stocks at all. In that, it is pretty clear that a set of stocks that you should be avoiding at this point would be the ones which are falling knives which we all know are the commodity-linked kind of companies, the poor balance sheet kind of companies etc. If the world goes into a difficult spell, more than whether the Nifty is going to 7,300 or 7,500, there is an opportunity that in a good period a lot of the balance sheets would get repaired. However, if global capital gets scarce now, I think you will find a lot of stress will float up to the surface. The kind of trade that people were talking about in January-February this year — which is to go out and buy stressed balance sheets because they will repair and you will get much better bang for the buck for some of these stressed companies — they will find it very difficult to fix their balance sheets and that will convert into a lot of stress in public and in some cases private sector banking universe. So, that is one fallout of a difficult liquidity situation globally. The poor balance sheet companies go out of the fancy trade completely and people start focusing once again on good balance sheets and high quality companies.I fully expect the market to become narrower from here on. You are seeing signs of that already. The midcaps and smallcaps are not doing well and that would be the first place where people would want to check out. But as I said, this is a market in a complete flux at this point in time. So, things could remain very choppy and you could get very sharp bounce-backs. So, there is no simple trade in hand right now.Latha: Let us move out of trades and look at earnings for a bit. Are you getting a sense after you looked at Q2 numbers at least of some consumer companies that there is a healing process underway in the economy and therefore at least an earnings worry or worry of earnings downgrades cascading is out of the way?A: This quarter was a mix. There were some positive signs to latch on to, there were some negative signs as well. So I do not know whether it was such a conclusive quarter in terms of a turnaround, in terms of earnings. Also remember that the Nifty has a fair component of export earnings as well and that picture now becomes quite unclear with the way the world is shaping up.I do not mean to sound alarmist for one minute, but if the export basket continues to do badly going forward — I think IT might be on the watch-list, I would not be rushing out to buy IT stocks right now at all — then you might have a very bipolar earnings picture and on balance, the Nifty or the Sensex earnings might still not be recovering at the pace at which we think it may be recovering.But my point is a little different. What we are doing right now is to say India stands out in a relative light and that is absolutely correct. The Finance Minister is saying the same thing, the Reserve Bank of India (RBI) Governor is saying the same thing and brokers are saying the same thing — that India is in a better position. It certainly is but if this becomes a problem of the magnitude like previous global disasters in the market have turned out to be then these relative trades are not very important. What you then begin to see is a big shift or a tectonic shift in asset class preference. Then it does not matter whether one country or one equity market has better fundamentals than the other.My fear is not that India is in a worse situation compared to Brazil or Russia or China or even the United States. It is whether global investors take a dim view of global growth prospects and realign asset classes completely. We can see some starting signs of that with the way the US bond market is moving. If and when that happens, then one country is never singled out and India will fall regardless of very good fundamentals relatively in line with other equity markets. I hope it does not come to that because relative outperformance of India falling less than other markets is no consolation for the crowd that we are speaking to which is the domestic investor. He cares only about absolute performance and absolute performance may be hampered in a difficult global scenario.Again, to repeat we are not there yet. This is no global bear market, at least yet. However, you need to be vigilant, because if it shapes up to be that then I refuse to buy that India will be singled out and continue to rise in the face of a falling global equity scenario. History tells us that never happened and it is completely wishful on the part of brokers to think that will happen this time around.Latha: So, you will keep your cash in money market funds, fixed income money?A: In the current time, as they say, if you run away, you live to fight another day. But there are no points for being brave in the stock market, it is a difficult situation. It may get uglier, it may get worse, we do not know.If you are sure that the market is not going to run away from you, a 15-20 percent sudden move from here and (makes you feel) you have missed the bus, then it is prudent to say, let me miss out on the next rally of 3-4 percent, but I would rather be safe than sorry because it is hard earned money at the end of the day. Let the money earn 8-9 percent for the time-being, let the global picture get a little clearer. If I have to buy at this point in time, let me buy high quality at reasonable prices and choose only from a few baskets – the blue-chip housing finance, blue-chip private banks, infrastructure companies with absolutely clean balance sheet and a few top notch pharmaceutical stocks.Your buying basket is now limited to a handful of stocks and a handful of sectors in the midst of this global turbulence. Within that, if you want to cherry pick, you certainly can, but I will not be going out all guns blazing before this situation clears out a little bit globally.