UBS Securities says time to pick your stock, go bottom-up

117010 Investors following Infosys. Share this News with them.

0

Like this story, share it with millions of investors on M3

UBS Securities says time to pick your stock, go bottom-up

With disappointments by heavyweights in the earning season, high inflation and higher crude prices, Suresh A Mahadevan, head of India research with UBS Securities says it is surprising to see how the market has held up despite the odds.

Post your opinion here

 

0

Tweet

Share on Tumblr

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets Infosys BSE | NSE 31/05/12 Are Mutual Funds betting on Infosys? Other Stocks in this news Reliance Industries | HCL Technologies | Tata Consultancy Services | Wipro | Bharti Telecom | Axis Bank | ICICI Bank | Larsen and Toubro | Bharat Heavy Electricals | NCC | GVK Power & Infrastructure | Lanco Infratech | Coromandel Agro Products and Oils Ltd |

With disappointments by heavyweights in the earning season, high inflation and higher crude prices, Suresh A Mahadevan, head of India research with UBS Securities says it is surprising to see how the market has held up despite the odds. "Markets seem to be ignoring the marginal bad news that is coming out. The last 10% rally has surprised us as well. It has not come at the back of any strong catalyst," he says.

He advises to focus on specific stocks at this point in time. "It is time to focus on specific stocks and then look at a bottom-up kind of an approach. The broad market as such may have only 10% gain left, perhaps by end of the year whereas specific stocks could do much better than that," he adds.

Below is a verbatim transcript of Suresh A Mahadevan's interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: How are you feeling about the market half-way through earnings season and with the kind of macro back-drop we are having today?

A: Markets seem to be ignoring the marginal bad news that is coming out - whether it is high crude prices or some of the earnings that were bit disappointing and also of course, we have seen flows on the other side which have been good. We still think market can probably gain a little bit by end of the year may be another 10% or so. However, the last 10% rally has surprised us as well. It has not come at the back of any strong catalyst. It has just come because of flow. Therefore to that extent may be in the short-term, there can be some correction but generally we are positive, pretty biased on the market.

Q: On flows specifically though, what are you picking up? Is it a lull because of earning season where investors are waiting and watching? What is happening in terms of performance or has that big rush of money tempered now?

A: Certainly it has tempered and last two-three days have been much slower than the past fortnight or so. However, the volumes are low but I am still quite surprised by how well the market has held up despite whatever small negative news at the margin - whether it is high inflation or higher oil prices or even some of the heavyweights disappointing, in terms of earnings and of course earnings momentum has also clearly turned to the negative.

Therefore, it is time to focus on specific stocks and then look at a bottom-up kind of an approach. The broad market as such may have only 10% gain left, perhaps by end of the year whereas specific stocks could do much better than that.

Q: How has earning season gone down for you so far?

A: At the margin, the earning season has been disappointing but we are only through with the initially few. Infosys  and Reliance  have been disappointing but overall the results have been okay. We will have to wait for some of the others companies to report their results though it is not going to be very spectacular. According to the indications, the earnings may disappoint at the margin. However, the market doesn't seem to be taking note of these disappointments at this point of time.

Q: Aside of Infosys and Reliance, the two obvious ones, any other marginal downgrades that you have needed to do so far after looking at earnings?

A: More or less things have been in line, other than these two big names of Infosys and Reliance. However, I wouldn't worry too much because the advance tax numbers were pretty decent. In the earnings there is a small disconnect. We will have to wait and see how the rest of the season progresses before jumping into conclusion.

Q: What is keeping the market afloat the point that you were making because we haven't seen huge liquidity over the last three weeks from the FIIs? Is it expectations that money will come because the dollar is so weak over the next few months or is it a confidence that earnings will not decelerate too much over the next few quarters? What do you think is keeping it standing at this level?

A: The global markets have been strong. Some of the factors have been priced in earlier, because crude, inflation, even earnings momentum turning negative is not new. Therefore, it is just that the market may have discounted it and then at the margin, when flows came in, maybe the market went up.

We may see a correction at some point of about 5% to 10%. India is a market where long-term investors have to be long because it is compounding at a pretty high rate. Its weight in most indices is going to go up. Therefore, from that perspective, I would use declines to buy select stocks. I am looking at a correction, we are not really that bearish but the behaviour is a little bit surprising. There are a few negative data points but the markets are still strong, which is a little surprising to me.

Q: Both upside and downside risk and potential are weighed at just that 10% range, because from India's point of view that is a pretty narrow range. What is your take?

A: Yes, certainly, we have a long bias towards the Indian stocks. We are going to compound at least at 15% corporate earnings. Hence, I would point towards slight disconnect in the short-term since few data points have been negative but markets have been strong and resilient. As and when more data points come in, whether it is a rate hike or more earnings disappointments, you could see pull back. However, structurally we are still fairly positive. If you take a 2-3 year view, the scope for returns is much higher because every year you compound at 15% and you may get a little bit of PE rating on the back of that.

Q: What is your observation on how disparate earnings have been within sectors? For example in the IT sector, you still have a sell on Wipro and Infosys was disappointing whereas HCL and TCS were the complete opposite end of the spectrum.

A: Infosys is a quarter specific and company specific issue. We are not too worried about it, in fact we have been advising clients to buy Infosys on declines. Now that TCS trades at 13% to 15% premium to Infosys, maybe Infosys is still the stock to buy but clearly there have been interesting kind of moves within the sector. Broadly, the misses may marginally outnumber the hits in this season.