Mkts to remain positive in the short-term: UBS

Excerpts from CNBC-TV18's exclusive interview with Manishi Raychaudhuri:  

Q: How much do you see global markets rallying from here and what's your sense of whether we have seen the bottom for now?

A: I do not think it's easy to put a number as to how much the global markets would rally from here. But if one looks at the way the markets reacted both on Friday and the way they reacting on Monday these is obviously a positive reaction to the Fed signal that it's likely to cut rates to accumulate the liquidity crunch that we are seeing all across the world and that is a positive signal for markets all across the world.

In the very short-term view, I think the Indian market would also remain positive which is clear from the way the Asian markets have reacted. Most of the large Asian markets are up about 3-5% today.

In the Indian market there is unknown element today in terms of the domestic political uncertainty, which may imply that the Indian market may slightly under perform the rest of Asian markets today.       

Q: What is your own sense of what has developed in this past fortnight or so, globally and what sort of ramifications it might have for liquidity for India as a market?

A: If we focus on the problems that we have seen in the subprime space in the United States then most of the Asian countries are possibly not affected fundamentally by what's happening in the US and if this subprime problem translates into an actual economic slowdown in the US then some of the export linked economies in Asia maybe affected but India is certainly not one of them.

Having said that the problem is not exactly with economic fundamentals but it translates into a liquidity problem. For the first fortnight of August, we have seen almost about USD 700-800 million being withdrawn out of the Indian markets and even from the overall Asian markets, we have seen somewhere close to about USD 6-7 billion being withdrawn.

It's difficult to put a finger on exactly how much could be withdrawn further but I suspect that this particular instance of volatility would continue for some more time. One reason for that is whenever you have a possibility of economic slowdown in the developed world, investors tend to get a little cautious about risky investments, particularly of equities and there is a shift to the safer economies and safer asset classes.

I  think that this volatility would continue for some more time. But there, I would point out one thing about valuations; this decline of close to 10% in the Indian market, in rupee terms; have opened up lot of opportunities. On pure raw P/E multiples the Indian market is possibly trading at about 16-16.2 times one year forward. But there are quite a few stocks in the Indian universe which have lot of embedded values, where there are assets that are not really adding to the earnings of the stocks but which are adding to the stock price which are artificially inflating the markets valuations. So if one were to strip out these embedded values, the market would appear significantly cheaper, maybe around 13-14% cheaper than what it appears.

There are quite a few stocks, quite a few sectors where this correction has opened up interesting entry opportunities.

Q: How worried would investors be about the political situation as it stands now? Do you think global investors would be skittish about it or just disregard it as noise?

A: I think global investors could be a little worried about it because from the sound bytes that we are getting there is some uncertainty even about the survival of the government and for especially someone who is sitting at a distance; he may not be exactly able to appreciate the ground realities.

Having said that I think there is consciousness and understanding among the local and global investors that the economic reforms that we had been talking about like the reforms in terms of labour law changes or in terms of disinvestment by the government, those have stalled quite some time back and so this new bout of political uncertainty doesn't really change much on that front. This uncertainty may not be really sustainable although it may continue for some time.

Q: If you had to restructure your portfolio right now, what would you be most overweight on and underweight?

A: Currently as far as overweight and underweight stands are concerned, I would not change. For instance, we currently have the biggest overweight positions on the capex linked sectors like the engineering, construction or the construction materials like cement for instance. I think that possibly would continue at least in the medium term.

Our next large overweight positions are in IT services and in telecommunications. Telecommunication is possibly one area where we may actually look forward to increasing our position because some of these stocks have declined very sharply and on valuation terms given that the growth outlook has not really changed going forward, they are actually appearing far more attractive than they used to.

We are also overweight on pharmaceuticals, though that's not really a sector specific call but more of a stocks specific call because different stocks tend to behave differently and even the drivers behind different stocks are quite different. Another thing that we are possibly looking at right now is the possible peaking out of the interest rates cycle. We believe that the lending rates, which decide the consumption cycle, they are possibly unlikely to go up much further from here.

From that point of view, even though currently we are neutral on autos and underweight on banks, after this global uncertain scenario kind of settle down, we may look forward to increasing some position on the interest rates sensitives. 

More to come...