Gautam Chhaochharia, ED & Head-India Mid Cap Research, UBS Securities advises Indian investors to be defensive. He is underweight on the financial sector. He likes Federal Bank, ICICI Bank at the current levels but not SBI. “4700-4800 is a good support level for the market,” he added.
Below is the transcript. Also watch the accompanying video.
- Q: Where do you stand on the market?
A: Our view still broadly remains the same that we still recommend investors to be defensive in the domestic market. However, India still remains open to global risk appetite. So, what we are seeing over the last 2-3 weeks that risk rewards in the Indian market are unfavorable.
So, if you look at the performance of the Indian market, it is broadly similar to what happens in the US and European markets, where even on weekdays, markets are opening weak on some bad news but rallying up to close either flat or up. And that is what is happening in India. So despite of continuous disappointment on the policy front, we are still seeing markets holding up quite well in India. Therefore, the market has been mispricing the risk of no policy action in India, which does represent downside potential in terms of fundamentals in India.
- Q: If 10-15 per cent is all that you get in these moves, then wouldn’t staying on the sidelines, being defensive is a wrong thing to do?
A: I agree. I think there we have been highlighting that a more reasonable range for the Indian market given the current quality of earnings and growth outlook and valuations look more like 4700-4800 on the Nifty on the lower side to 5300-5400 on the upper side. So, to put on any positions on these Nifty levels, doesn’t make sense in our view.
So, being defensive does make sense. When we say be defensive, it doesn't necessarily mean to short India or get out of India. It means focusing more on a defensive kind of a portfolio and even in that context, you always have opportunities for bottom up stock ideas, which we keep recommending.
For e.g., we are underweight on financials in India. We still like bottom up ideas like Federal Bank, ICICI Bank. We don't like SBI. So, it is actually a mixed approach. So we agree with you as the market is rangebound but given where the market, earnings and evaluations are right now, it doesn’t make sense to become more aggressive.
- Q: Where do earnings go from here?
A: Earnings is actually one of the reason that we are highlighting that 4700-4800 is alike a good support level for the market fundamentally. If you look at earnings estimates now, which are broadly about 13-14 per cent growth rate for FY13 and FY14, is inferior compared to history.
However, it is not bad in absolute terms. If you look at the assumptions behind them in terms of topline growth, the estimate is actually in single digits, which makes it quite conservative compared to the GDP data. So, in our view, earnings estimates of analysts are not significantly behind the curve. They are building in reasonably muted economically cycle, so the downside is limited.