Celebrate new highs but be cautious, advises ENAM

Despite a bull run from the market, experts recommend being cautious going forward till some structural growth is seen. Vallabh Bhansali, chairman of ENAM says core issues of inflation, earnings, investment cycle and so on have not seen a positive trend completely.

"One cannot pre-empt US Federal Reserve’s decision on tapering of quantitative easing (QE) too," he tells CNBC-TV18.

The market as well is looking cheap based on book value, but not on earnings, Bhansali says. However, few medium companies have performed well and it can be participated into, he adds.    Also read: Market rally has no meaning; narrowness a worry: Experts Below is the edited transcript of his interview to CNBC-TV18. Q: Is this a time for celebration or is this a time for caution? A: When the new king comes, you must celebrate, but should always be cautious until the rein is established. Q: Experts say that market that has been driven by only liquidity. Is that all? Is the market telling us that the worst is over? We have had a government that has managed to get some work done, a Cabinet Committee on Investment (CCI) set up to clear about the Rs 3.5 lakh crore worth of projects. The current account deficit, rupee is coming under control. The earnings season has been much better than what people expected. A: Indeed there was a persistent effort ever since Chidambaram came to finance ministry again. We have seen that at least the legislative noise around food security and other things has gone down and it was a big distraction for the market. At the same time, chickens haven't come to roost. Lot of it is expectation whether it is the next government, whether rupee has finally stabilized, forex reserves are borrowings and so on. Only thing that happens is that good companies’ continuously cash accretion take place and therefore the book value keeps growing. On that multiple basis, the market starts becoming cheaper. On an earnings basis it may not be. Secondly, the worry out of banks has not gone. The government has announced capitalization of some of the PSU banks etc. So, they may be breathing easy but banks will still have concerns. _PAGEBREAK_ Q: You have seen many market highs over the last several decades. To me this high is characterised by the lack of retail participation, the lack of any excitement in the primary market. We are not seeing companies rushing out to raise money given where the markets are today. How would you compare the highs that you have seen today or the current environment in the market with the several highs earlier? A: Each high comes with its new characteristic and therefore one has to be cautious. The market has a way of finding its way down and up if not the same way but in a rhyming way. Therefore, the investment cycle has yet to pick up. Earnings have yet to stabilise. The global winds may have paused a little at this point of time, but they have far from ceased to blow. Nobody really has an idea of how the taper come. You go to US and some of the European countries you see economy doing well, but you read some of the international analysis you will still continue to worry. The macroeconomic balance sheet of the world has never been worse because it is so hugely leveraged. We have seen a lot of leveraged companies doing well until the knock on the door comes and then everything falls like a house of cards. So cautious is the way to go. Having said that a lot of the good quality medium kind of companies have seen their stocks run up and given a chance, I would like to participate. Q: What is your big call now? This market has been very bipolar. Off late we have started to see some broadening of the market. Would this be a top-down market, a bottom-up market? Where do you think investors would make money going forward? A: Clearly valuations are the only way to make money. That is only theory I know. I am not a top-down person at all. Given that you do not see a secular trend in growth in earnings or growth in asset quality one would have to be bottom-up. As and when you see secular trend that okay the worst is over and earnings will come and investment cycle will pick up etc. that is not happening for another six months. Until then, it has to be bottom up. Q: Would you recommend that this is a point that investors should get into this market? A: I have seen markets where retail comes last and therefore institutions lead the market. So, in itself, I wouldn’t want to rule out the bull potential only on that account. But a bigger question is that if the next quarter earnings don't turn out okay, we will have trouble. We thought inflation will come under control just looking at the monsoon or post monsoon; inflation has still not gone away. There are happy developments basically on the fiscal side; the food security having gone past as we have got used to that kind of fiscal situation. Now with revision in fuel prices and direction being set, you are seeing some concerted action on rupee. As per the rest of the things are concerned, I think it is much too little for us to think that the situation is altered and that is my bigger concern.