Don't go short yet, but time to become cautious:Udayan Mukherjee

There is no evidence to suggest that the good run in equities is getting over, but it is definitely time for investors to get catious says Udayan Mukherjee, Consulting Editor, CNBC-TV18.Mukherjee says he will will closely watch global commodity prices and the dollar index.He says the recent correction in crude prices and the sell off in Brazilian equities should give reason for investors to pause, because these assets were at the heart of the rally in the global markets.Mukherjee says the upswing still has momentum and investos should not go short on the market at these levels.He says a better approach would be to start cashing out in sectors where the rally has not been driven by fundamental factors, and invest in quality defensive stocks. He is positive on the IT sector after the healthy earnings performance by Accenture.Mukherjee says he will not buy PSU and metal stocks after the recent rally.He says the stressed borrowers of PSU banks will struggle to sell their assets for a good price in this business environment. The uptrend in the market has raised hopes that struggling steel and infrastructure companies will be able to sell assets and reduce their debts, but the business reality is different, Mukherjee says.He is bearish on BHEL and says the stock has been beaten down so badly that the smallest of positive news triggers a rally. He says there are better private sector players to play the infrastructure story.Mukherjee is bullish on road companies as he feels they have good earnings visibility. Many of the road companies have robust order books and a schedule of completion over the next 2-3 years. Unless somethign calamitous happens, the road companies should have a steady stream of earnings as the projects get completed, he says.Below is the verbatim transcript of Udayan Mukherjee's interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.Latha: Just read the global cues for us first. We had four weeks of strong rally but last week truncated week everywhere, things seem to settle now, already Fed governor is talking about the April rate hikes still not entirely out of the radar. So do you think the good run is over now and we should start worrying?A: I don't think there is enough evidence to suggest that the good run is over but should you become a bit more cautious, absolutely yes. Last week more than what the Fed governor said, the fact that crude oil corrected about 5 percent and Brazil which has been the poster boy of this emerging market rally, also came off about 3.5 percent, those might give us some reason for pause not because those are the strongest assets per se but they are the ones, which have rallied the most and triggered off this emerging market rally in a sense.So, if you agree that this is a global rally at the heart of it then you must worry about any signs of cracks appearing in that global landscape. So, I am not suggesting that the fall in Brazil and crude are the start of something very ominous but it is certainly something that you need to keep on your radar because those are the areas where the first signs of trouble might start showing up. As you said, it has already been a very powerful rally over the last one month.So, I would watch the commodity space very closely now for some signs of any kind of fatigue or signs of worry resurfacing in the global spectrum. I would also watch the dollar index carefully because the weakness in the dollar index has triggered off a big rally across emerging market currencies and if that starts unravelling somewhat then you might see the pace at which money has been coming in to emerging markets also slow down.So, the market momentum is still strong, there is no doubt about that. I don’t think the point has come for traders to go short at least on the current evidence but should they be vigilant and watchful about some of these small worry things, which are popping up on the screen? Absolutely, yes.Reema: In the month of March, we have seen beaten down sectors like public sector undertaking (PSU) banks, metals, real estate stocks rally close to about 20 percent. Tactically, should traders continue going with these sectors like PSU banks, metals or is it time now to perhaps go for more defensive names considering we have already put in close to about 10 percent rally on the index?A: These things are very difficult to time because the rallies that some of these beaten down, weaker sectors put out are very powerful rallies. So sometimes, this kind of advice is better had from a trader or a professional trader who will be trading with stop losses and technical targets and if you pre-empt and essentially these are fundamentally weak stocks and therefore I want to get out at the first 10 percent rally then you might walk out leaving a lot on the table.I am not a good trader, so I have no idea where some of these stocks might be topping out. I agree with your question that putting such a strong rally, you would start milking these stocks. If you have got a 20-25 percent rally in some of these weaker sectors, if you don’t sell everything in one day, maybe every 2 percent more from hereon, I will liquidate 20 percent of my holding. So, even if these stocks were to rally 10 percent from here, your average exit price would be still somewhere close to the highs that these stocks might top out at. That is the best I can think of on how to exit some of these sectors, which have rallied a lot. I think you should be exiting them because fundamentals have not changed at all in some of these beaten down sectors, I know there is a lot of optimism that commodities have turned around and therefore one should be buying metal stocks now but after a 30 percent rally, I wouldn’t have the heart to go out and buy it as an investor.To the second part of your question, if you want to be in this market, should you be in better quality stocks? You can today think of a lot of stocks which are very good pedigree, fundamentally they are doing quite well, which have also rallied quite a bit. Ashok Leyland is a good case in point which has gone up to Rs 105, that may correct if the market corrects but the evidence of those corrections tell you that they will outperform the market in a fall. The same might hold true of some of the higher quality IT names. So, would I be inclined more towards with Infosys and Ashok Leyland rather than with DLF and Vedanta? 100 percent yes.Latha: Over the last one-two weeks, we have seen banks making a lot of noise with respect to their defaulting or their stressed promoters not yet defaulters perhaps, there is that ultimatum we hear given to even a company like Essar Steel, a very powerful group and then you had the Prime Minister over the weekend saying that defaulters should not be spared. Is all these adding up to some positive pressure, would you still continue with that beleaguered sector of PSU banks just for a trading pop?A: From a trading perspective, maybe there is a little bit less juice left in these PSU banks but I will have to see more to believe it because yes, there is a lot of positive noise and that is happening all this noise and this public attention might have a good side to it that at least we are recognizing the problem, it is being discussed out in the open, let us see how it gets addressed but merely by talking about it, some of these problems won't go away.The commodity cycle I don’t think has turned for the better conclusively, steel companies still have a lot of problems on their hands. Would they find it very easy to sell assets in this kind of a market? I doubt that very much.The thing right now is that because the markets have rallied such a lot, intrinsically there is more optimism in the air. So, all that you are hearing now -- if you would have heard it at 6,800, you would have read it with scepticism that okay, they are trying but what is the big deal. There is no easy way out of this mess. These banks are going lower and these beleaguered companies are not going to find the going so easy. However much noise we hear around them.But at 7,600, things look different that okay stocks have rallied, State Bank of India (SBI) is no longer languishing at Rs 140 or 130, so now you think that maybe things have turned for the better. So, I am hesitant to say that public sector banks will ride into the sunset from hereon and everything has been fixed or on their way to getting fixed. I think stock prices sometimes play tricks on our mind. So, I would hold my horses. If I had to be with my banks, I would still be with the quality names. These poor names probably are running beyond fundamentals now.Reema: Valuations at 7,700 for the markets are not cheap when you compare it -- just a month ago it was 6,800. Any sectors or stocks which come to your attention where the valuations are still looking attractive and therefore offer a good entry point for long-term investors?A: You can find a handful of stocks at any point where you can think about investing but you are right, it has become more challenging. It is not just that the Nifty has gone up 12-13 percent, I think most of the quality names have gone up 15-16 percent. So, what was 14 P/E by definition is now 16.5 P/E and that doesn’t make the job of investing or fresh entries any easier.The thing right now is that -- and that is the big call for investors is not about just pinpointing individual sectors or stocks, my assessment is that we are in a global situation. It is not an India situation. It would have been far easier to take an India specific call at this point in time, which I have heard a lot of strategists take over the last two-three weeks after the rally saying that with the worst is over and India is on its way back to 9,050, in vacuum or in isolation you could talk about specific stories in India and index targets. The problem is that this problem is not just an India problem, it is also a very big global problem because if you look at the synchronicity of the rallies in March, that tells you that this is much less an India specific rally. China and India have gone up the same amount in the month of March. That should tell you something. Their rallies, their indices are up the same 10 percent in March. That tells me that this is just a global rally which is playing out and the outcome is also global. It is not India specific. It is all tied to emerging market flows.So, if you look at the evidence in March, domestic institutional investors (DIIs) have sold about Rs 10,000 crore but foreign investors bought about Rs 15,000-16,000 crore and the market has gone up 10 percent. So, if we look at what the evidence was in the months when foreign institutional investors (FIIs) were selling in the month of March, this is a very easy solution or analysis of why the rally has happened. It has happened because a lot of money has come back into emerging markets. So I think for investors too, they should ponder over, what triggered off this rally, is it sustainable, how are things looking globally before they press the trigger of investing because it is not just enough to look at the India in isolation.Latha: Construction companies -- people have been referring to it, are those areas that you would still persist with infrastructure flavoured stocks as well as I wanted your view on BHEL after CLSA's thumbs up to that stock, are you convinced that it has seen its worst?A: No, BHEL is a stock which I do not like and I have consistently not liked. The point is that it has got beaten down to pulp and the smallest kind of a positive news might give it a little bit of a fillip.There are whole lot of other companies which one can bet on in this space, if you want to play on infrastructure turnaround. So I am not enamoured by BHEL at all.In fact, there are very few public sector companies which one can think or or I can think of which one can start investing in when they have more efficient private sector peers, I am not a big fan of public sector companies. BHEL is being such a wealth destroyer that barring the fact that it has lost 70 percent of its marketcap already over the years that you could get some kind of bounces on positive news but I wouldn’t be a big fan of BHEL at all.I like road companies because there is very strong visibility -- visibility is a big issue in this kind of a market because a lot of companies don’t have volume visibility, they don’t have the confidence to go out and do capex, a lot of their capacities are lying unutilised and if you compare that with the road construction companies, many of them have significant order books, they have a schedule of completion over the next three-four-five years and you could see that unless something calamitous happens, they will keep clocking revenue from some of these projects over the next few years and I like those kind of companies because you at least have in a difficult global environment some kind of visibility or assurance of a revenue stream going forward.So, I would say that if you can choose a good 4-5 road construction companies particular in the midcap space -- there are a few of them -- then I think they make for reasonably good investment bets in this environment.