Although the Indian equity market saw a 400-500 point rally from the lows; three are still many looming risks like higher interest rates in US, Greece situation etc in the coming days, feels IV Subramaniam of Quantum AMC.On the economic front, although things seems to be improving, earnings are still backended and the market may have to face many headwinds until there is clarity on earnings by year-end. This may lead to a decline in market, says Subramaniam in an interview to CNBC-TV18.However, according to him when the Sensex declined from its peak and came closer to 26,000 many individual stocks started becoming attractive.Talking stock/sector specific he says, the metal space hasn’t seen any visible trigger yet to make them interesting. However, there is every possibility of demand and pricing power coming back for them over a period of time. The house is upbeat on the steel space and likes Tata Steel but would not add afresh.From the IT space, he prefers largecap names over midcaps because big companies will be able to address large geographical markets like US, Europe etc. Moreover, valuation wise too they are not too expensive, he adds.One has to focus both on earnings and valuations simultaneously and they look good for the consumer discretionary space. So, the house is bullish on that space from a long-term perspective, especially the two-wheelers and hotels, and would look at adding more of those into the portfolio, says Subramaniam.
Below is the transcript of IV Subramaniam's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.
Anuj: What is the call on the market now? We have seen 400-500 point rally from the low. Do you see the worst being over for the market, is the risk reward favourable even now or would you wait for some correction from these levels to add fresh positions?
A: On the overall market side I still think there are many risks to be faced but individual stocks became a little attractive as he Sensex declined from 29,000-30,000 levels and it came down more closer to 26,000. There were individual stocks, individual sectors which looked a lot more attractive, so definitely that was a time to deploy some cash into the market, but having said that the overall valuations for many companies still look expensive, the risk has not yet gone away, global risk in terms of higher interest rates or Greece are still problems which we need to see how it pans out.
However, coming specifically on Indian economy while things are improving, the earnings number is still very back ended and between now and the complete earnings visibility by the end of the year, there are many headwinds which may come and that may allow the market to decline even further.
Ekta: What is your take on the entire metal space? Which are the stocks that you like and dislike from current levels?
A: If you look at the long-term price charts, long-term demand trends across emerging markets and slight uptick in developed markets, the valuations do look attractive. The key point is - what is the trigger which will help these companies to grow in terms of earnings, while we know that demand is there and the pricing power will come back for these companies over a period of time, we have not yet seen any visible sign of a big trigger which would make this sector interesting. Therefore, at this point we like the steel space and we own Tata Steel and we continue to like that but we are not yet willing to add to any new positions in that sector.
Anuj: On the Bank Nifty and in specific on public sector undertaking (PSU) banks, do you think they are good value buys right now or would you avoid till we see some more proof of asset quality improvement?A: It depends on specific banks. If you look at the PSU space, there are the likes of State Bank of India (SBI) and whole lot of smaller PSU banks and while the asset quality is an issue across the banks, some banks manage it much better than others. The larger banks seem to be managing it better than the smaller ones in some cases. So we are not averse to buying into PSU banks but we would specifically look at the fundamentals in terms of capital adequacy and how they plan to address the asset quality. Whenever we see a good reason or reason to believe that the management can improve the asset quality, we will not shy from owning PSU bank.Ekta: What about the IT space?A: We like many type of companies across the board but preference is larger ones because the midsize companies have different kind of dynamics in terms of the issues they face are very unpredictable, so therefore trying to gauge how they would perform over the long run, is difficult compared to the larger ones.
We also think that these companies would be able to address quite a large geographical market; they began with the US and now they are addressing Europe and other regions. So we feel there is a good, solid business case for these companies to continue to grow and in terms of valuations, they are not cheap but at the same time they do not look very expensive either. Therefore, we like the larger ones and we hold couple of them in the portfolio.Anuj: From fund manager's point of view what is the biggest risk for the Indian market over the next 6-12 months, do you think it is more domestic in nature or more global in nature?A: Risks can come from both domestic as well as international. We can only identify what are the possible areas where it could come from. However, from the international side, the question is how long the foreign institutional investor (FII) flows would continue to be strong and that would depend on what kind of interest rate scenario one looks at. So at the beginning of the year the expectation was that at the middle of the year the interest rates in the US would go a lot higher than where it is right now but now it looks like that has been pushed to the latter half of the year. If that were to happen despite the fact that it was expected it could still shake the emerging markets and that would definitely have an impact on India as well.On Indian economy, the monsoon appears to be good but we still need to see how they pan out over the next two months. And of course the actual corporate earnings, the spend on infrastructure, how does that pan out and where do the numbers look better than what it was in the last few quarters. We need to see the earnings profile improving significantly for many companies. If that gets delayed that's a risk. So I cannot tell you which one would play out, but these are risks which as a fund manager we need to be alert and have some ideas as to what to do if something comes up. Ekta: In the coming earning season which sector would you be most confident about in terms of reporting better numbers as oppose to its other sectors and as oppose to the previous quarter?A: I do not track the quarter on quarter numbers. For us the long-term trends is where we try to understand the companies and the consumer discretionary space looks attractive to us in the long-term. So companies like the two-wheeler companies which had a fairly poor quarters in the last few couple of quarters, for us they look good in the long-term and definitely that is a space where we would put lot more money.Similarly, there are other kinds of four-wheeler companies; there are hotels which one could buy.
So consumer discretionary definitely looks good but you have to look at earnings along with valuations. So for us even if earnings growth is good, let's say in fast moving consumer goods (FMCG) or pharmaceutical, the valuations are pretty rich and it doesn't enthuse us to buy into these stocks. Consumer discretionary - we will see earnings growth plus the valuations are reasonable, so we won't mind adding to that space.
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