Outlook positive, but fund managers at a loss as to what to buy?

Moneycontrol BureauNear term outlook on the equities remains largely positive despite lingering skepticism if the rally can sustain in the face of bad news from China, Europe or the Fed.But the bigger challenge for fund managers and brokers is to identify stocks available for a reasonable price as the market is beginning to look expensive after the near 20 percent upswing since early March.“If you look at the market on a top-down basis, things are looking good,” Sanjeev Prasad of Kotak Securities told CNBC-TV18 in an interview, pointing to the policy measures by the government, positive economic data and better-than-expected corporate earnings.“But if I look at the market from the bottom-up basis, that is where the struggle starts. We don’t find that many attractive ideas at this point in time,” Prasad said.Benchmark indices are trading at roughly 18 times one-year forward earnings, which may feel is on the expensive side as a full-blown earnings recovery still seems some quarters away.Brokerage house Credit Suisse says the Indian’s market’s one-year forward index (aggregate) earnings per share looks set to rise after nearly one-and-a-half years of stagnation.“This expectation is likely the reason index P/E is high,” writes Credit Suisse’s India Equity Strategist Neelkanth Mishra.However, Credit Suisse says it will closely watch the improvement in earnings before calling a bull market.After hitting a low of 6825 in early March, the Nifty has rallied nearly 1400 points, riding the upbeat mood in global equity markets. Barring public sector banks, corporate earnings for the March quarter were not as dismal as most analysts had expected. And yet, there were no big positive surprises either, prompting some hard-nosed analysts to question if the current valuations are justified.“The irony is that nearly everybody is saying valuations are expensive and outlook is uncertain, and yet they continue to buy expensive stocks instead of value stocks many of which are available for a song,” said Anoop Bhaskar of IDFC Mutual Fund in a recent interview to moneycontrol.com.Bhaskar says stocks in sectors that are doing well are expensive, leaving fund managers with little or no choice.Citing the example of the cement sector, Bhaskar says a fund manager will find it hard to get outperformance unless he is willing to take concentrated bets on a few stocks.That means sectors which are already expensive could remain so for some more time or even get costlier as investors prefer to stick to companies where the earnings growth appears more predictable.Private sector banks are a case in point.“These stocks are trading at 18-20 times earnings which is not cheap; I am not trying to say they are cheap,” Morgan Stanley analyst Anil Agarwal told CNBC-TV18.“But you are getting 20-30 percent revenue growth, so in that backdrop, I am not saying multiples will expand. Even if multiples sustain where they are, if you keep trading at 18-20 times earnings, earnings are growing at 20-25 percent, so you make 20-25 percent return which is not bad,” he said, adding he did not expect the PE multiples to derate in these stocks unless there was a “big downward cycle in India.”Also read: Credit Suisse lists 7 stocks on buy list; says no risk-on rally