Don't rush to buy stocks; let prices come to you: Udayan

"That is a classic case of stock prices coming to you rather than you getting anxious about the Nifty going to 9000 and getting into a tizzy and buying stocks at very high valuation levels," he says.

Below is the transcript of Udayan Mukherjee’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Nifty is 10 percent lower since we last spoke or at least since recent highs of 8996. What is the sense you are getting? Are we going to lose a lot more from here?

A: It is possible that we drift lower from here because we have been discussing the fundamental reasons which might have triggered such a correction in any place. I mean they were all in place. We had weak earnings and earnings which were not recovering quarter after quarter that was the fundamental weakness driver. Around it you had very high valuations compared to many other markets in India.

So poor earnings plus high valuations anyways is a dangerous cocktail for the market and around that you had other small irritants like the prospect of a not so great monsoon this time around. Even the new government’s honeymoon period euphoria is also beginning to wane from a market perspective. These four fundamental drivers were acting as some kind of a headwind to the market but what is precipitated this 10 percent correction might have been some technical triggers.

Sometime fundamentals can be bad but you need some technical triggers to just about jolt the market into corrective phase. The minimum alternate tax (MAT) on foreign institutional investors (FIIs) along with the fact that market has been a fairly ranked underperformer compared to other emerging markets, which in a tactical sense, is putting a lot of FII outflow pressure on this market. These twin technical triggers might have brought about the correction which was fundamentally overdue in any case.

Sonia: Is this an opportune time then for retail investors to jump in and buy some of these good quality names or given that we might see further weakness in earnings there are still some negative global triggers to play out, you can get better opportunities in the months to come?

A: I would hesitate to say jump in. However, I would say that you might start getting your feet wet. I would say the same thing that I said about a month back to you that this is not a phase where you want to chase stocks. You want to let stock prices come to you as they have over the last one month. Many of the high quality names, you look at the Nifty or outside the Nifty, have corrected between 15 and 30 percent – that is a classic case of stock prices coming to you rather than you getting anxious about the Nifty going to 9000 and getting into a tizzy and buying stocks at very high valuation levels.

I still think we are in that phase where you want to patient when you are buying. Yes, to answer your question in short I would look to be a buyer in this correction but you want to be a little tactical right now given that you are not feeling terribly left out. This is a phase where stock prices are giving you opportunities so you don’t want to rush in and say I need to buy today otherwise the Nifty will be at 9500 tomorrow. I think the chances of that are fairly dim and therefore you want to be patient in building a portfolio. So, yes, you need to buy but you need to buy slowly and patiently and not jump in and buy because the market will run away from you tomorrow.

Latha: The IT space, when that dip comes will you buy IT, will you advise IT space buying at all or are all the numbers all of which were unnerving below street estimates telling you something about the sector? A: It is a difficult call admittedly because in the near-term I don’t think the market is feeling very bullish about the IT space. So in the near term there is underperformance. Keep in mind that stocks have corrected already. Most of the largecap IT names are down 10-12 percent post their earnings. These stocks usually don’t correct 30-40 percent; they trade in that valuation band of 15-20 times. When things are not great they will drift down to 14-15 times, when things are good they will go up to 19-20 times but broadly they don’t have the kind of volatility that you associate with a lot of other sectors. These are very high quality businesses so it depends on what your risk appetite is. If you are a near-term tactical trader maybe IT will give you a little bit more grief in the near term. However, if you are the sort which wants to basically buy good businesses when things are a little rough and you want treat them as annuity kind of businesses and ride them over a three to five year period then the next three to six months – not even six months I think the next one to three months might be a good time to accumulate some of these high quality names. When you look back after three years you will find that this phase might have been a rocky phase but on hindsight it would turnout to be a good accumulation phase for high quality business like them. Over a period of time I still think you will make money from IT but one to three months it might just give you a little bit more pain.

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Sonia: Apart from IT where else do you see any kind of returns coming from or any kind of value in the market? Because PSU banks have gotten hit really hard since the start of the year, oil and gas is not moving at all and this month even pharma has sold off quite a bit. A: Pharma needs to sell off a little bit more. In fact it ties in with this point about IT; if you look at the defensive basket fast-moving consumer goods (FMCG) and pharma despite their recent correction are way above in terms of valuations compared to IT. So, if the market continues its correction after a while you will find that people are still flocking back to some of these high quality businesses despite seemingly stretched valuations. In that since there is mood of valuations compression right now in FMCG and pharmaceuticals you might see IT valuations bottoming out after a while if this correction phase in the market persists beyond the next 1-2 weeks. However, pharmaceuticals need to correct a bit more because some of the froth or fact is beginning to come off. Even high quality stocks now, you can clearly see it in the Nifty FMCG stocks or some of these very good quality pharmaceuticals names. However, I think this is a phase where instead of being tactical, that is for the fund manager to do what will I own for the next three months if the markets correct and relative to my peers what will my performance be you leave that to professional fund managers. If you believe that we are in a goodish kind of phase for the next 3-4 years which I believe we are, then this is the time to focus on building your portfolio and not get carried away by what should be my tactical approach to this market in the short-term. I would say it is still not a great time to be accumulating sector like commodities, metals, upstream oil, real estate, low quality infrastructure stocks and public sector banking stocks. There may seem good value because of the recent correction but they are still not in that phase where they will give you great returns over period of time. Use this correction to buy the same old which is your private sector banks, high quality infrastructure names, some of the auto names, some of the NBFCs and some of the midcap consumption plays. This is the basket you need to be accumulating if the market gives you a bigger opportunity in the weeks to come.

Latha: Speaking of banks the Axis Bank numbers came out yesterday. I don’t know whether you watch them closely but are you getting a sense now that Axis is showing enough stuff to perhaps some what narrow its valuation gap with HDFC Bank?A: Banks is a billion dollar question. Axis was good in terms of numbers. ICICI Bank had few wrinkles but the key to the correction is what banks will do over the next few weeks. If you look at this fall barring the last week or so in a sense it has been led by the banking sector. However, the way ICICI bounced back from Rs 300-330 despite some of those asset quality wrinkles I think is an interesting pointer because the key to whether the Nifty slices through this 8,000 levels and goes further lower from here also depends on the Bank Nifty and the Bank Nifty has shown resilience in the last 2 or 3 sessions.So, I am watching banks very closely because these banks corrected quite a bit all of them the private sector names and public sector names and then they have started finding support after the quarterly numbers. In the next two days the most critical part of the Nifty will be what some of these private banks do. Is this just a short covering bounce now that the results are out of the way or is this sign that some of the investors are beginning to comeback and say enough is enough there is nothing wrong with these banks and we need to be accumulating them. They have formed their valuation bottom here so, that would be interesting. I personally think that these banks will probably correct some more even if they bounce for a few days but we will find out in the next week or two.

Sonia: How are you assessing the global situation at this point because it is interesting how China has overtaken our momentum? This month itself the Nifty is down 3 percent but the Chinese market is up about 20 percent odd or so do you think that we could lose out to some of these other markets like China that perhaps look better on a valuation parameter? A: We have in a sense, as they say success breed success and the same can be said of near term failures so the fact that our underperformance is being so pronounced is creating some kind of technical pressure on the market there is no doubt about that. You can hear a lot of FIIs saying that we are very bullish about India in a medium-term but it is very difficult to swallow down a 20 percent kind of underperformance in the space of 4-5 weeks and still say I will sell nothing in this market I will stick to my horses.At the end of the day it is all a relative game and therefore the most bullish fund manager would have taken notice of India’s recent underperformance. It is a very small period so you do not want to read too much into it. However, more than the global situation, my sense is that valuations in India are mean reverting and not because of global pressures. It is simply a question of the market saying we have been patient for the last 4-6 quarters but earnings have not caught up and therefore valuations probably now need to mean revert to the long-term average of 15 odd times. In that central question right now is where are earnings going to end up over the next one year or so. If you look at it carefully the estimates are varying quite wildly. The lowest part of the spectrum is 1,600 that is the Sensex earnings per share (EPS) from Kotak and the highest estimate is Rs 1,800 from Morgan Stanley. I have rarely seen one quarter into the year; you don’t see a 12-13 percent gap between the most bullish and the most bearish estimate for the Sensex. The question is where do we end up with Sensex earnings over the next three quarters and depending on that the valuations will find the floor. However, valuations are mean reverting to about 15 odd times and that probably well in the days to come determine where the Nifty finds a floor.