SENSEX NIFTY
Jul 27, 2013, 01.38 PM IST | Source: CNBC-TV18

Indices painting false picture; portfolios bleeding: Udayan

Not just high beta stocks but even public sector and private banks have failed to post reasonable returns says CNBC-TV18’s Udayan Mukherjee.

The Sensex near it's psychological important 20,000 level and the Nifty touching 6,000 is an incorrect reflection of the Indian equity market, says CNBC-TV18's Udayan Mukherjee.

Mukherjee, in his analysis and expectation of the market, says the indices are belying the pain being felt by investors. Barring investors who hold stocks like HUL, ITC and TCS in their portfolios, most other portfolios have bled profusely. Not just high beta stocks but even public sector and private banks have failed to post reasonable returns says Mukherjee.

"Most portfolios don't look like they are at 20,000 level, Most portfolios are probably trading at 12,000-13,000 Sensex kind of levels. It has been a painful market for sure with the exception of maybe 15-20 stocks which have done well and if people are lucky enough to own them, then that is good. But otherwise it has been a very bad market again this year," he adds.

Below is the edited transcript of Mukherjee's analysis of the market.

No one would think that the market is going through such stress given what the index is trading at- 20,000 on the Sensex, nearly 6,000 on the Nifty. That belies the kind of pain that most people are seeing in their portfolios.

It has been a very lopsided market. People who are lucky to own Hindustan Unilever Ltd (HUL) and ITC and Tata Consultancy Services (TCS), they have done well. But for a lot of people, the older crowd which have been holding portfolios for the last five-six years,  they have gone through a lot of pain and not just in infrastructure but many clusters like public sector banks. Even private sector banks have not been doing very well over the last month and that is the pocket of pain.

Most portfolios don’t look like they are at 20,000 level, Most portfolios are probably trading at 12,000-13,000 Sensex kind of levels. It has been a painful market for sure with the exception of maybe 15-20 stocks which have done well and if people are lucky enough to own them, then that is good. But otherwise it has been a very bad market again this year. 
Ideally it would now be a good selling point for portfolios for someone who has been out of the game for six years. Everything comes in cycles and one generally does not want to be bearish at the end of a six year cycle. But this time it is different, because cycles do change.

The only thing this time is that the factors that could lead to a recovery in equities eventually seem to be getting continuously postponed. So, unless something happens miraculously to change sentiment globally or locally, it is difficult to now build a very strong case for equities.

One can probably in parts of the market, build a valuation case and that is very important. However, for a stock like Larsen and Toubro (L&T) which is probably there in many portfolios, when does the recovery start to happen?

A lot of people would have thought maybe even a year back that, that was a great time to be buying L&T because the turn is just about to come. However, the turn just keeps getting postponed every three months. Every quarter that passes, both the macro and the micro data is suggesting that this whole process of bottoming is taking such a long time this time around.

Hence, that confidence of buying now and waiting for six-nine months hoping that their turn is just about to come, one just doesn’t have that confidence that it is going to happen in 2014 and that equities at the end of the day will track underlying economic performance with lags. So, that is complicating the picture right now.

My fear is that in the next three-four-six months, we may wake up to the possibility that unlike what the finance minister is saying, that 6-5 percent was the base and now it is going to be 6 percent growth this year, 7 next year and so on, there is a fair possibility that we end FY14 with something very close to 5 percent again.

Two years back-to-back of close to 5 percent growth can wreak havoc to the system, it does not matter whether America is 2 and we are 5. I was reading an article that people in IIMs are not getting placed. When have we heard that in the last ten years? So, one look at some of these metrics and they give you that bad feeling at the pit of your stomach that we are not on that swift path to recovery that the politicians in Delhi are telling us about.

One has to play the waiting game. It is easy for us to come and say great time for equities, great valuations, go in and buy, but it is people’s money at the end of the day.

A lot of fund managers who put money to work now, one should ask whether they are putting their own money into equities or they have been for the last six-twelve months and you would find that a lot of people don’t have the conviction to put their personal money on the line. They can put somebody else’ money on the line but their own money they are probably better off hiding.

The thing it is complicated because inflation is still high and in cities probably running at 9 percent, does one have something that which beats inflation post tax and that is the argument on which most people slip that their money is getting eroded because they are not making post tax 9 percent. Fixed income has delivered that over the last one-two-three years but FDs are probably not doing that. One gets 9 percent and post tax you are not covering inflation.

But the point is, it is ok as 100 goes to 107 post tax. You lose a little bit, your money erodes just that little bit compared to inflation but at least your capital is safe. But often people say that they don’t want to take big risks and once the picture gets cleared, then they’ll look at it. But what happens is that one may miss a large part of the rally, maybe that happens on election day or it happens for some reason and you miss 10 percent and people have had this fear because it is six years and no returns have been made.

Smart people are thinking if I sit on my hands for any longer, I will miss that big equity turn but see the message that the market is telling you, you have that 10 percent rally, it goes to 6,100-6,200, everybody says, “Oh, this is the miss I was talking about”. It keeps coming back to 5,600.

So unerringly the pendulum swings the other way. At some point it will not come back but has that time come? I don’t think the economic environment is telling us today that we are at that point where the market will tear away, expand valuations on the back of this very tepid 7-8 percent earnings growth
If one looks at companies, the 500 stock index or outside the index, there is no earnings growth, which is why those companies are doing very badly. So, it is not to be too negative but money is hard-earned money. You save some money with your salaries at the end of a lot of work, years pass and you make a nest-egg and then you want to take risk, you have to be a little prudent with that because that money can be whittled down very quickly as we have seen in the stock market.

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