Bullish on IT; see realty demand picking up: Morgan Stanley

In an interview to CNBC-TV18, Gaurav Doshi, vice president, Morgan Stanley PWM gives his outlook on the market performance. He says the market will be driven by two key events- the RBI's monetary policy expected on Januray 29th and the Union Budget.

Doshi is also optimistic on global money being invested in India. He says, "For the week that ended on January 10, 2013, we have seen a record USD 7.1 billion being put into dedicated emerging market funds. This broke the previous record of USD 6.1 billion for the week of December 12, 2007. So, the global liquidity aspect seems to be intact and definitely the global money is investing into emerging markets."

Post TCS results that came out yesterday, Doshi says he is maintaining his overweight view on IT sector and expects the demand in the realty sector to pick up in the upcoming quarters. "In general, we continue to maintain a view, which is far above consensus that the sector is definitely a must own. We believe that these quality companies should be a part of your portfolio. We continue to maintain our overweight view and I think in the Infosys results, along with the commentary from the TCS management goes to show that discretionary spending is definitely improving," he adds

Below is the edited transcript of Doshi's interview to CNBC-TV18.

Q: What is your tactical call for the rest of January? Are you guys playing for strength or pullback?
A: If one has to take a tactical call, there are two critical events. One is Reserve Bank of India’s (RBI) policy meet at the end of the month and then there is the Budget that is going to follow. There is always hope while we go into market.
So, from the domestic trigger point of view, these two key events could potentially keep the momentum intact in Indian market. With regards to what is driving Indian markets, it is clearly liquidity. From that aspect typically, one would have expected that in the first two weeks of January, there would be some amount of outflows because of the New Year and reallocation and rebalancing.
However, this time around we have seen something different. For the week that ended on January 10, 2013, we have seen a record USD 7.1 billion being put into dedicated emerging market funds. This broke the previous record of USD 6.1 billion for the week of December 12, 2007. So, the global liquidity aspect seems to be intact and definitely the global money is investing into emerging markets.
As long as we continue to receive our fair share of global allocation, the momentum that we have should continue. So, from a pure tactical point of view, given that the liquidity is robust, the key events in which the market is expecting a sort of a rate cut, there is some sort of a positive tone from the RBI and we have got a lot of noise on the policy front, I think this momentum should continue and the trend in this market should stay intact. Q: Tactically, how are you approaching the market? Are you taking profits at every higher level now in this liquidity fueled gush? Or are you actually adding to your positions?
A: One has to be very selective. We still think that there are certain sectors that offer value and opportunity to even add at these current levels, while some sectors that have had a fantastic run. Banking is one sector that everyone has talked about, but banking has had a really good run. If you actually see the relative chart of Bank Nifty versus the Nifty over a one to three month period, the out-performance is enormous and the valuations seem very stretched. So, I would say that certain sectors such as banking or fast moving consumer goods (FMCG), staples or healthcare where there is very little room for disappointment or stretched valuations, one should definitely be taking money off the table.
In any case, these sectors are relatively beginning to under-perform the Nifty. We believe that one should be looking to reallocate in sectors that where we still see value, where valuations are supportive and given that we are almost in earnings season, I think market could be positively surprised from a lot of the sectors that have been written off. Q: How are you positioning yourself in IT after hearing out Infosys and Tata Consultancy Services (TCS)?
A: As a house we have thankfully, been long overweight IT for the last 1-1.5 years and it has been a mixed bag in terms of performance. There is TCS that’s been a strong performer, but there’s also Infosys, which had disappointed for pretty much most of 2012. However, in general, we continue to maintain a view, which is far above consensus that the sector is definitely a must own. We believe that these quality companies should be a part of your portfolio. We continue to maintain our overweight view and I think in the Infosys results, along with the commentary from the TCS management goes to show that discretionary spending is definitely improving. The market seems a little too concerned about sustaining revenue growth for these companies, which we think these companies will be able to manage. Q: What’s the strategy on oil and gas at this point? There is also Reliance that’s going to come on Friday.
A: Oil and gas is really more than a sector. We just have to look at individual stocks. In the last two years we have just become so afraid of owning stocks where there is a high correlation to policy and government action and subsidy burdens etc. So, within oil and gas, I do believe that there is great opportunity especially given the fact that we could get some good triggers in the form of government reforms. For example, a diesel price hike, LPG price hike etc. However, within this sector, I think tactically there is an opportunity to play this policy. But with a longer term view as an investor, I would wait for more clarity as to what really plays out or what this government is able to implement with regards to pricing of diesel before aggressively going and chasing this sector.
Specifically on Reliance or Cairn, I think these companies have individual triggers. They have an isolated basis. There is an opportunity and more importantly, there is value. Therefore, I think this is a sector that one has to approach more on a stock specific basis. However, in general, like IT I think the market is way more concerned. By the time the market sort of addresses its concerns I think valuations will have moved much higher from here. Q: Are you working with any Nifty targets for the first couple of months because that’s where the big bulk of moves come?
A: We don’t have a target for a couple of months. Our house view, base case is that for 2013, the Sensex should achieve above 23,000-23,500, but that’s the base case. Let’s not forget that we have got a lot of tailwinds in the form of policy. We have got a lot of tailwinds in the form of global liquidity.
The pace of implementation of policy is critical. Even though we might get a slightly populist budget, which is a strong possibility, I think market will be able to digest that and move higher. So, while we think with the pace at which current things work, we think 23,000-23,500 is probably what the Sensex can deliver this year. However, there are just so many moving parts right now that we will be more than happy to revisit in a few months. Q: The space that’s been seeing a lot of upgrades is the real estate lot. How are you approaching that space and what leg of it or what pocket of it do you like?
A: Real estate is definitely incrementally starting to show signs of recovery, but again it is a very selective because you have to look at companies that are managing to get rollover debt or reduce debt, more importantly. We are seeing a lot of old projects starting to get executed and we are starting to see those realisations trickle in. Even the pace of new launches has been moderate and in a way that’s good. The response from buyers is also seeming to improve with a potential interest rate down cycle that could play out over the next four to eight quarters.
Typically, interest rate cycles last for about two years. I think we could see the making of the demand revival coming back into real estate. So, one has to be very selective. The companies with large debts are still going to face a lot of problems because I just don’t see how that quantum of debt can get offset within a matter of one or two quarters. So, I still think one has to look at niche players who have definitely got the ability execute.
The land bank story is really a bull market story. It is more about execution, the ability to get old projects of the systems, start realisations and the ability to price effectively with regards to the new launches. So, it is really a case-by-case basis, but incrementally, for the next eight quarters I think there is an earnings up cycle that we could see in this sector.