Most stocks ex-consumption, pharma, FMCG to fall: Malik

The upmove seen Indian equities last month was aided by liquidity gush and correction in commodity prices, but the current undertone is mildly bearish, cautions Rajan Malik, Head Equities, PCG Phillip Capital India.

The key level to watch out for on the Nifty now is 5900; however, 5,600-5,700 could be well on cards. The Nifty, which has been moving in a 700-800 band for quite some time now, may get stuck in this range going ahead in absence of any key global or domestic triggers, he said in an interview to CNBC-TV18. The focus in the second half of FY14 will be on specific stocks. Rajan advises investors to remain invested in consumer staple names. This is election year, so social sector spending will be very high, which is likely to percolate into higher demand for these names, but valuations certainly do not justify buying these stocks from an investment perspective, he explained. On the flip side, if the market slips further from hereon then most sectors like banks, autos and realty barring consumptions, pharma and FMCG names could correct. "If one believes that 5600-5700 is a base then go and nibble around with the hope that if it falls any further, one could nibble around more. But that’s a longer term investment philosophy. From a trading philosophy right now, one is best sticking with the leaders and remaining on the short side," he suggested. Meanwhile, though one has not come across any evidence that the investment cycle is picking up, post-elections, he is hopeful of better times for the economy and equity markets. "Business confidence seems to have improved in the recent past, but it has not translated into investment activity. Once elections are out of the way, things might just stabilise and things might become better." Below is the edited transcript of Rajan Malik’s interview with CNBC-TV18 Q: It has been a difficult kind of start for the month. How do you reckon it is shaping up? Do you foresee more downside risk for the market or an attempt to consolidate now? A: The market seems to be adjusting towards depreciating currency. What happened last month was easy liquidity and fall in commodity prices perked up the markets. It is now coming back to base. We are of the opinion that the current undertone is mildly bearish. Therefore, 5900 is an important level that the market participants would be watching out for. But we believe 5600-5700 could well be on. For some time now, the markets have been moving in a 700-800 point Nifty band with the base shifting upwards. It started from 4800, went up to 5200 and now it seems to have perked up all the way to 5500-5600. So, this band of 700-800 points should be maintained if it was not for any express triggers internationally or for domestic markets. Q: We have also begun to see both dwindling of flows and some kinds of short build up on the market. Would you say it’s a greater likelihood the market actually breaches that 5600 mark rather than find some stability or support right here? A: The market has a mildly bearish undertone right now. But we would be watching out for the 5500-5600 levels for now and then we will wait for some kind of international or domestic triggers. We still believe that the band may hold for the time being. Q: The corporate earnings this quarter was a serious wake up call for anyone who thought there was economic recovery in spaces like capital goods or infrastructure, etc. What is your key take away from earnings and the implications it could have on the equity markets going ahead? A: There were no major surprises in the earnings. Barring one or two infrastructure stocks like for example Larsen, things were well in place. We all know and understand that while there maybe intent on the part of the government to spur up things, there is very little content as of now. It will be some time. There really is no evidence that the investment cycle is picking up. Until that happens, one really can’t see growth going to where they want it to be and for better times for the equity markets ahead. Business confidence seems to have improved in the recent past, but it has not translated into investment activity. Post the elections, things might just stabilise and things might become better. _PAGEBREAK_ Q: If you do believe that this market could be headed towards those 5600-5700 levels, what could lead to this downfall in terms of specific sectors or stocks? A: Right now, all the sectors that went up seem to be correcting and led by the banking sector. What happens is that for the markets to go up, you need momentum, but for the market to fall absence of buying itself will lend the headwinds that will make it fall. Like you rightly said, the absence of flows into the market seems to be taking it downwards as of now. Q: Any thoughts on today’s new listing – Just Dial? A: It’s a good stock, but all is a question of relative valuations and we would want to wait until valuations stabilise before we take a call on the stock. Q: What’s the best way to approach the market if you sense that there is a bearish undertone at this point? Is there still a trading opportunity to buy at lower levels and trade the market up or are you getting the sense that the second half is actually going to be even tougher than the first half where year-to-date, the market has actually generated nothing? A: It is going to be more of a stock specific story rather than a generic market story. There will always be opportunities for people to buy into the market and sectors that they want to on. Right now, most stocks that one would want to own are already priced to perfection. For the last two decades that I have been following these markets, there hasn’t been a single year when we have not seen decent entry points and exit points. Just wait for your opportunity. I am sure you will get to the opportunity to get in. _PAGEBREAK_ Q: The problem hasn’t just been for banks. It is basically everything that comes under the rate sensitive bracket. Autos have started suffering real estate has got pounded. Do you have any thoughts on some of these sectors and how you want to approach them? A: They will all fall if the market were to go down. Barring the consumption story in some of the FMCG sectors and maybe pharma which is holding on, everything would possibly be correct. Somewhere along the line, even the over owned sectors will have to correct. So one has to be very watchful of what is happening in the market. If one believes that 5600-5700 is a base then maybe one can go and nibble around with the hope that if it falls any further, one could nibble around more. But that’s a longer term investment philosophy. From a trading philosophy right now, one is best sticking with the leaders and remaining on the short side. Q: Today many real estate companies might be in focus because the union cabinet has cleared the real estate regulator bill. How do you see some of these companies react in case this bill goes to in its entirety? A: Most of these stocks have already priced in what is going to be happen. We may see a knee jerk reaction, but ultimately it’s the overall demand-supply scenario that’s going to take these stocks up at all. We have seen people nibbling in these stocks. They give you 10-15 percent return only to return back to where they started from. The investment cycle does not seem to have started or have pick up in the manner that we would have liked. We will wait for our investment opportunity until such time as the market gives better indications. From a trading perspective, one could play anywhere. Q: A lot of people are now talking about how the party in the consumer staple segment could be over because of high valuations, etc. How would you approach that entire pocket including some of the heavyweight FMCG names? A: Most of the stocks that you want to own are already price to perfection. But then one needs to understand that this is an election year and social sector spending will be very high. That is likely to percolate into higher demand for the consumer sector. So, that’s a space one could still continue to be invested in, but valuations certainly do not justify investing in these stocks from an investment perspective. From a defensive perspective, one still needs to be in. Q: What’s your observation on what exactly is happening with the domestic crowd? Is it still investor apathy or did they use this rally to 6100 plus to kick in some more redemption pressure or is it that looking at this offer for sale (OFS) route and looking to get into individual stocks via that medium? A: A lot of people are using higher levels to take an exit. What is happening is that the opportunity cost in India tends to be very high. So if you can earn upwards of 10 percent on debt and some of these structured products, you might as well be in that space and wait for your opportunity than to stay invested and watch your stocks go down. But once again it’s a stock specific story. Stocks will continue to give you returns. Wait for your opportunity, keep stocks on your radar and once you get your price, just get in. Q: How would you approach the entire midcap space now? Many of those stocks are down about 30-40 percent since the start of the year. Is this a good time to buy stocks or would you stay away from the broader markets? A: What you are asking me if I want to be brave right now. All those people who have been brave, the midcap index seems to be telling you the story. I don’t think I want to be brave at this time. I would rather stick with leaders, wait for an another opportunity and even if need be, buy these stocks higher when we are convinced that we are in a secular bull run. We don’t seem to convinced on that right now.