2012 maybe a year of outperformance by high beta stks: UBS

Q: The rupee has turned quite a bit and is now closer to 49. In that context how would you position yourself in frontline IT?

A: IT is something which we think probably did very well in the later pert of 2011, primarily because of the rupee.

Since August the rupee started appreciating and in times where things are little bit tough there is a general flight to quality which also helped the IT names. But having said that I think given they are essentially placed on US and Europe, at these prices the chances of them underperforming are quite high. Particularly if we assume that there is an economic recovery, we are actually quite cautious and negative on this space. So even in my model portfolio I am quite underweight IT at this point.

Q: Interestingly your top picks from banking are ICICI Bank and SBI; both in their own fields have had the most pressure through all of last year. What’s the call that you’re going with on those names?

A: Again the view is if you are playing a market recovery then ICICI looks pretty good. Banking as a large sector because last year HDFC and HDFC Bank did quite well and we had them in our portfolio pretty much, if the market momentum where to shift to a recovery then you are better off playing ICICI and SBI.

So its in that context, we also like federal bank and a couple of gold finance companies but if you want to play the banking space for a recovery then these two kind of give you quite a bit of exposure.

Q: How much would you expect to see through coming in terms of policy surprises? On Friday there was talk about revitalising, all that talk on decontrol in the sugar sector on policy with regards to sugar or fertiliser, are you at all hopeful?

A: Basically the big picture in India is we have a phenomenal opportunity given a demographics etc. The government has a very important role to play but since May 2009 it has been a fairly large disappointment and that’s where the market is where they are despite some levels of earnings growth coming through every year.

What I am hoping is once we get through this round of state elections then there is some kind of initiative from the government to push through some reforms whether it is GST or direct tax code or having the land acquisition bill sorted out.

There are a lot of areas where we can make progress and I am hoping the government recognises the opportunity and tries to get through some of the reforms.

Specifically it could come from various sectors but generally our view is that potentially 2012 is going to be a little bit better than 2011 because I don’t think we should expect big bang reforms in India, the big bang happened in 1991. Given the composition of the Rajya Sabha I don’t think big bang is possible but incrementally it could be positive in 2012. Which is what actually the market needs for a rally to sustain.

Q: You are almost done with this earning season, at the end of it do you think you will need to mark down your overall earnings expectation, the sensex EPS. Do you think earnings are beginning to trough out now or would you expect another couple of quarters of sluggish or tapered or more downgrades?

A: My sense is that we are probably at the trough of the earnings downgrade. Earnings momentum while it continues to remain marginally negative now I don’t see massive revisions going forward partly because the rupee as well as perhaps the monetary cycle turning. Maybe in a couple of quarters you might even have positive earnings momentum which maybe quiet welcome for the market.

However, FY13 EPS of around Rs 400 for the Nifty kind of looks like when we are almost there maybe it goes to Rs 390 but beyond that I don’t really see a lot of downside. So yes it's probably troughing out.