Better safe than sorry is Anoop Bhaskar's strategy to ride out the volatility he foresees in the market over the next three months. Mr Bhaskar, who is the head of equity at UTI Asset Management Company, expects the market to be driven by liquidity more than anything else in the short term. But he will avoid the high beta stocks, and position his portfolio defensively. In an interview with ET, he says that any upswing in major indices will be driven by large-caps that have underperformed so far.
How do you see the market playing out over the next three months?
The US economic data signals a slower recovery than expected. And, therefore, earnings growth may not be as strong as expected. Then, there are the (sovereign debt) problems in Europe. In this context, current equity valuations appear rich. However, there is a significant pool of money sloshing around the world, and that liquidity doesn't seem to be drying up in a hurry. If you were to be a sane investor and stay in cash, you are practically getting no return for it.
It is the riskier assets — commodities — emerging market equities that are providing the kind of returns that investors expect. That money flow still has not reduced. It gets reduced whenever there are fears of a systemic breakdown. As soon as those fears subside, that money again starts looking out for riskier avenues to generate returns that satisfy investors. So, we are in a phase where valuations are neither expensive nor cheap; they are being driven by liquidity. And the flow of liquidity will determine the movement of the market and valuations.
Locally, what are the factors you would be worried of?
The three risks always in the stock market are valuations, macro-economics and liquidity. In terms of valuations, we are in a zone of neither comfort nor discomfort. In terms of liquidity, it is slightly lower because of the recent 3G auction. Globally, it remains high, despite the huge withdrawals (from Indian shares) in May and patchy inflows in June. So, liquidity doesn't look very promising for the next one month or so. Interest rates over a 6-12-month horizon look to be trending lower. But over a 1-3-month period... it's uncertain because of the liquidity that has been sucked out due to the 3G auction and advance tax payments. Once that money returns, liquidity should not be much of a problem.
What strategy would you follow to ride out the short-term volatility in the market?
In times like these, it's best to be closer to the benchmarks, and move up the market-cap scale. Between a small-cap and a large-cap in the sector, we would go for the company with a larger market cap. They will be more stable and if the market falls, they will not be as volatile as small-caps.
If liquidity were to take the market higher, which set of stocks or sectors do you think are best placed to gain from it?
If you look at Nifty large-caps, the only ones that have not been able to breach their highs made in May last year are Larsen & Toubro, NTPC, Reliance Industries (RIL) and Bharti Airtel. Of these, L&T has just about managed to break that peak last week. These stocks together have around 20-22% weightage in the Nifty, and have been underperforming their peers for the past 12 months. Most other Nifty large-caps are fairly valued. So, if the Nifty has to move up in a big way, these four stocks will have to perform. They are under-owned and available at reasonable valuations.
Which are the stocks and sectors you like in this market?
On the defensive side, we like pharmaceuticals and FMCGs. For a contrarian call, we would buy Bharti at times, because everyone is really underweight on it. On the infrastructure side, construction companies have shown that they are improving their balance sheets, and with the kind of order visibility and sales visibility they would have, there will be less negative surprises on that side. As for banks, there are concerns that rising interest rates could upset the apple cart. But because of the huge weightage of banks in major indices, we would be neutral or very close to neutral on banks. IT would also be a good defensive bet, if there is an inflation scare or high interest rates. In such a scenario, the rupee would depreciate, and that would give a natural protection to IT stocks.
Which are the stocks or sectors you would steer clear of in the short term?
Many of the high beta stocks of 2008-09 are losing steam and investors are becoming wary of them. Some of the traditional high beta stocks like Suzlon, Punj Lloyd, RCom, which even professional investors would take a short-term bet on, are the stocks we would avoid, as they are showing a lot of fatigue and the risk-reward ratio is not favourable at the moment. We would look at buying large-cap cement stocks like Grasim and Ambuja, if they fall 10%., but not at current prices. We would be light on state-owned banks for the next month or two. These are all tactical calls for a short period of time.
What about the cash levels in your portfolio?
We are sitting on less than 7-8% of cash on an average across our portfolios. It could be higher in a few schemes, but that's because those schemes could be announcing dividends shortly. We are not taking any cash calls at the moment.
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'I made my money by selling too soon.'
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