Would avoid chasing momentum but build a portfolio that has reasonable valuations, said Harsha Upadhyaya, CIO Equity, Kotak Mutual Fund.
The market ended the week flat with the Nifty ending mildly in the red and the Sensex with very mild gains. But how should one trade the market next week and what are the investment ideas in case the market corrects more?
Harsha Upadhyaya, CIO Equity, Kotak Mutual Fund believes the current correction is a healthy one but cannot say if it is going to go any deeper or not, as yet.
However, Ashwani Gujral of ashwanigujral.com is of the belief that since the Nifty has not been able to take out 9700 decisively, and if there is a global correction then it could even go to levels of 9400-9200. However, at that levels enough shorts positions will build up and enough people on the other side for the market to have an assault at 10,000.
With regards to investing, Upadhyaya says at the fund house they have a policy of not keeping more than 7.5 percent in cash in any of their equity funds and so they will have invest with caution.
Upadhyaya says they would avoid chasing momentum but build a portfolio that has reasonable valuations.
With regards to inflow of liquidity, Upadhyaya says at their end they haven’t seen any reversal in money flow at any level whether it is retail or high net worth individuals. The flows continue to remain very consistent and strong.
Talking about GST impact, Upadhyaya says one is unlikely to see any fundamental adverse impact on the demand per se just because of tax implementation.
Stock specific, Upadhyaya says they are underweight on IT and pharma and would be very selective in housing finance and micro finance space.
Below is the transcript of the interview.
Surabhi: It has been quite a week which has divided people on the street as to whether this is just a bit of a pause, bit of consolidation or whether the market has actually made, as the chartists say, a double top. What is your sense?
Upadhyaya: Market is clearly struggling to move up. In the past few weeks it has been very clear that while the money is getting invested into the markets, you are not seeing a mad rush in terms of index moving up or one way. There has been some amount of profit booking in some select sectors and stocks. To our mind, this is a healthy correction that is there in the markets today. Whether it gets deeper or not, it is too early to talk about that.
Clearly there was a perception that at least in some pockets the over valuation was really beginning to haunt investors, that is where most of the vulnerability is and one has to be cautious in some of those overvaluation zones.
Latha: What would you do for instance on Tuesday and thereafter? Are you likely to buy at the current dip itself or looking at the way the market has behaved, would you move a little more into cash?
Upadhyaya: At Kotak Mutual Fund, we have a policy of not keeping more than 7.5 percent maximum in terms of cash in any of our equity funds. So within that leeway yes, we have been very gradual, even in the past, whenever we have felt the valuations are a little higher from a very short-term perspective or if there was any event that was impending, we were clearly waiting out that period. So that we could continue even going forward. But if we keep getting close, more than this 7.5 percent, and then obviously we will have to get invested into some of the relatively better or less risky sectors.
Latha: But is there a chance that you will not get the cash? Does retail look scared at all? After all, what are we, just about 1.2 percent or 1.3 percent away from the all-time highs?
Upadhyaya: We have not seen any change in inflows at our end at least. I am sure that is the case with the entire industry. The flows continue to remain very consistent and strong. So, I really doubt whether even if there is some correction in the market whether that will change. I am going by what happened in 2016. Whenever the corrections happened in the market, in fact, the inflows increased and if that continues, then I do not think there will be any reversal in flows anytime soon.
Surabhi: You mentioned that obviously the mandate is not to have more than 7 percent cash in the funds. Where would you deploy the fresh money that you are getting in right now? You said that you prefer to be in less risky areas of the market so could you elaborate on that?
Upadhyaya: Clearly, we are not going to chase just the momentum or the stocks where there has been good business growth and hence, stocks are trading at very high expensive valuations. So, I will not get into individual stocks, but clearly we are not looking at certain segments in the market, for example, some of the housing finance companies, some of the consumer discretionary names have really run up in the recent past and I am not saying that all of them are expensive, but clearly you have to become more stock specific in those areas and that is what we are trying to do.We have to look at overall portfolio earnings growth and portfolio valuations rather than the entire market, because at the end of the day, what matters to us is how our portfolio is constructed and if you are able to keep portfolio valuations at a sober level then we are fine.
So maybe there will be a few stocks which are at expensive valuations, maybe there will be few stocks at very attractive valuations, but at the end of the day, overall portfolio has to be reasonable valuation oriented portfolio in our sense.
Latha: Are savvy investors, large investors like say maybe corporates who are putting excess money with you, or HNIs already worrying about things like say GST maybe or the first quarter numbers or even whether growth is really taking off, are they showing any signs of turning turtle, holding back money?
Upadhyaya: No we haven’t seen any reversal in money flow at any level whether it is retail or high net worth individuals. So to that extent money flow continues to be strong. Yes there have been some concerns in terms of whether there will be hiccups in and around GST implementation, whether there will be rundown of inventory during this period, etc. However, those are I think smaller issues to contend with.
What we are looking at GST is, it is not going to fundamentally alter the demand dynamics in the short run. If that is so, if there is a rundown of inventory in June, then definitely that is going to get filled up in July or a little later. So, between June and September quarter I think that should get listed overall. Very unlikely to see any fundamental adverse impact on the demand per se just because of GST implementation. That is how we are viewing this entire event.
Latha: There are two sectors on which the street seems somewhat more sharply divided, the ones that have given a lot of returns, housing finance and microfinance. Housing finance the fear is that after all it is a commoditised business, very thin margins, so should they be valued so heavily and as well microfinance, farm loan waiver or demonetisation, are there collections under threat, how are you looking at valuations in both these spaces?
Upadhyaya: In both spaces one has to be very stock specific and cautious in approaching these sectors or sub segments of financial sector. On the housing finance part, it is clear that from a medium to long term perspective there is policy push, there is going to be enough money around the affordable housing theme and hence growth is going to be quite strong in the medium to long term. However, the point is some of the names have already discounted some of this expected future growth in the valuations today, or maybe more than immediate expected future growth. So, that is where one needs to be cautious.
I believe that not all of the housing finance companies can be looked at from the same risk metrics. There are companies which are not entirely retail in their approach, but still getting similar valuation and we all know that some of the chunky loans within the sector can have different risk parameters associated with that.
So, we need to differentiate between housing finance companies and then take a view about the investments.
On the MFIs, I think some of the issues are already well known, we have seen issues from Maharashtra, UP, maybe some parts of South India as well in the past in terms of MFI loans turning bad and some of that will get public during the June quarter results and definitely there is pain there. The recent trend of some of the state governments announcing farm loan waivers could also add to risk, although it is too early to comment anything specific to farm loan waivers, its impact on the sector, but I think that is just adding more risk to the sector. So, one needs to be cautious even there.
Surabhi: Are you in the camp that is looking for bargains in IT and pharmaceuticals?
Upadhyaya: No, we are completely underweight on these two sectors. The headwinds are still seen very large for these two sectors. The recent currency appreciation is also not going to help the sector. The margins are definitely going to be under pressure. Most of the expectations in the market today have not really taken the current rupee exchange rate.
Most of them are still using maybe 67 to the dollar kind of exchange rate. Definitely whether it is June quarter or September quarter, we are likely to see margin pressure in both these sectors which is not in the analysts' estimates. So clearly, we are trying to be cautious in the sector even now.
Latha: You did warn repeatedly that the market is unable to cross 9650 and definitely 9700 with any emphasis and it has been dithering here for 15 trading sessions or so. Now what is the expectation for the coming week, where can support come?
Gujral: First level of support is 9550 thereabouts from where the breakout happened. This could become a deeper correction because you have gone up for six months and if we get a bit of global support on the downside, I think anything between 9200-9400 is easily possible. If that happens you will build up enough short positions and enough people on the other side for the market to then have an assault on 10000.
The problem at 9650-9700 is that everybody is bullish. So, who is left to buy? So, that leads to a bigger correction rather than any sort of great selling. As you have seen institutions are still buying but yesterday what we saw was bull trap, market led the bulls to think that it was breaking out and then came down strongly and so that was likely to have follow through today.
Surabhi: In that case what are the best trading bets and would you trade the index, the Nifty Bank or any individual stocks that you would go with?
Gujral: Nifty, Nifty Bank, all these indices should come down. Individual stocks wherever big gains have been seen are likely to come off substantially and give you correction so that fresh buying can be done. So, for the moment, for next week you want to trade stocks on the downside. PFC we can sell with a target of about Rs 105. Escorts which was a highflier that has come off almost by Rs 90. That is probably going to go lower. You can sell that for a target of about Rs 635. Reliance Infra, Reliance Capital when they were getting a bashing, I had said that they are likely to move higher. Reliance Capital could move higher next week to about Rs 685 odd.
Latha: What are your thoughts on Monnet Ispat?
Gujral: You need to treat this as option trades that either it is all or nothing. Basically if things work out it can easily go back to Rs 90-100. If they don’t work out maybe he will lose half his money because I don’t think things of ten go down to zero. That is the play he needs to be betting on. It is not your normal average profit and loss type of stock. So, if that he understands, I think there is no harm in buying it because all the bad news is out.
Surabhi: What are your thoughts on Bank of Baroda?
Gujral: Today PSU banks have been the worst performers. This is basically act of faith type of trade that one day things will be better. If I were this person, anyway all stocks are coming down but the stocks which have the most propensity to go up are still the housing finance or the consumer stories. So, why not shift into a housing finance stock which is also coming off because whether Bank of Baroda will go back up or not that is debatable.
However the housing finance stocks which have just made new highs, if you get into them chances are much better that they will at some point make fresh highs. That is the problem with PSU banks that there are too many moving parts, it is not just one company and their performance, it is bankruptcy code, government, courts, this that. So, there are too many moving parts for the retail investor to mess around with PSU banks.The Great Diwali Discount!
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