Only way to beat market in 2016 is to be stock specific: Udayan

Feb 8, 2016

Only way to beat market in 2016 is to be stock specific: Udayan 

CNBC-TV18’s consulting editor Udayan Mukherjee says he first half of 2016 is a great opportunity for long-term investors with mouth-watering entry valuations.

The market could be broadly be settling in the 7200-7700 range in the near-term though there is a possibility of the Nifty breaching its recent 7250 low in the course of the year. 
However, Mukherjee says the first half of 2016 is a great opportunity for long-term investors with mouth-watering entry valuations. 

Investors need to be stock-specific rather than focusing on particular sectors, he says. While the small caps and midcaps have had a good rally, consistency continues to be an issue with them, he adds. 

Green shots ultimately will come from largecaps, he says adding that any improvement in the economy is reflected first in largecap names. 

Discussing the government’s announcement of minimum import prices (MIP) for steel products on Friday, Mukherjee says that the move is a temporary relief for the sector and not a permanent solution. 

Steel companies, which are in a bad shape, will get a boost from the MIP, he says. However, it will only last for few quarters and the steel demand and prices will continue to remain sticky, he adds. 

Below is the verbatim transcript of Udayan Mukherjee’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. 

Latha: All those announcements on Friday evening let me start with that first do you see it as a temporary relief, how should one approach both steel and banking stocks now? 

A: It is a government provided selling opportunity for people who have been trapped in steel stocks. You will get a bit of a pop as you are seeing this morning. It is not going to be a durable one because this is a band aid. I don’t criticise the government for what it has done. I think the steel companies are in such bad shape they could do with a little bit of leg-up and that is what the government has tried to provide them. 
I would seriously doubt whether this is a long-term solution. It is probably a very temporary one for the couple of quarters because it is a market distortion at the end of the day. I don’t think market distortions can be allowed to persist in definitely. So, it will probably buy a little bit of time for the steel companies. However, I wonder what will happen at the end of two or three quarters when the time comes to just put these measures into a bit sunset mode. 

Is the government hoping that it in two or three quarters steel prices globally will move up and therefore this time will allow steel companies to settle down and then ride a little bit on an upmove? That doesn’t look like it will happen because I think globally commodities are in a bit of a rut and that rut might continue for longer than two or three quarters. 

I think this is a temporary leg-up for the sector welcome and therefore you will get a trading pop in some of these steel companies. However, for people who are trapped in Steel stocks I think they should seriously consider this has a heaven sent opportunity or government sent opportunity to bail out of stocks which they have got stuck in. 

They shouldn’t think of this for a moment as a permanent relief for the sector. I think in the long-term steel prices and steel; demand remains extremely sticky and there is no easy way out of that mess. 

For banks, again may be two or three quarters of deferring the pain, may be some of the interest payments come in for the next two or three quarters and after that will get back to square one again with these very stressed out assets. So, it is trading pop in my eyes no more than that. Surely, welcome for the sector but for investors who are trapped they should bail out on using this opportunity. 

Sonia: The other positive that we got Friday onwards was the improvement in some of the earnings that came in from the non Index largecaps, names like Eicher Motors, Cadila Healthcare. Even largecaps like Lupin, how would you read in to all of this and what kind of trend would you decipher? 
A: There is no trend but it is important that the message from some of these good numbers that you have seen not just last weekend but also the week before that is that, time has come not to look at companies from a sectoral perspective but you need to become a little bit more granular now in your analysis of companies. 

The same sectors are throwing up very disparate kind of numbers. You saw what Crompton Greaves did and then you saw ABB numbers - chalk and cheese. You looked at what happened with IndGo and how much the stock has fallen and look at Jet Airways or even SpiceJet on how well it did. 

You saw some bad numbers from pharmaceutical companies and then you saw Lupin and even Torrent Pharma numbers were very good I thought. So, within the same sector I think some companies are coming out with reasonably good numbers and some are coming out with howlers. 

I think what you will find is intra sector lot of re-rating and de-rating going on and that may well be deterrent throughout this year that you will increasingly have to be stock specific. 

Like 2015 when the market actually had a down year but individual portfolio’s gave out reasonably good returns, your only chance of beating the market and sort of hanging out in a difficult year in 2016 calendar would be to be with some of these companies which are still delivering a reasonable set of numbers. The global pain is not going away but on a micro basis I think if you can still spot companies which are delivering earnings you probably can sheltered yourself somewhat. 

Latha: Companies like Westlife Development the McDonald guys there were a lot of smaller companies also which showed some extraordinary good numbers TVS Srichakra – do you see the proverbial green shoots?

 A: If the question is whether this is the start of an earnings turnaround I think you are looking at very smallcap companies. The problem with these smallcap companies is that they will do couple of really good quarters and then they will do one quarter which washes away all the good work that they have done. The consistency is the problem with some of these smallcap companies. So, whenever you want to see green shoots, green shoots will come from the largecaps. 

In smallcap to decipher or discern some kind of any earnings turnaround I think we are froth with a lot of hazards because large companies when they start showing you green shoots, to use your phrase basically they are telling you that something in the economic conditions is changing for the better because these are at the end of the day gross domestic product (GDP) plays the largecaps which form the Nifty. 

When economic conditions improve you will see the first signs coming into these largecap companies, so I am not dismissing the fact that some of these smallcaps and midcaps have done very well. It is delightful to see that they are battling such difficult conditions so well. 

However, I think this is not the start or heralding of a great earnings turnaround given that you have seen so many more downgrades in the Nifty companies compared to upgrades at the end of this quarter. So, stay stock focused, stay midcap focused but the overall economic turf still remains a fairly challenging one. 

Sonia: What is the sense you are getting about the market itself since you pointed out that the economic turf is challenging. Do you think that there is some sort of near-term bottom in place at that 7,240 level that we hit in the month of January or do you think that no level is sacrosanct on the down side now? 

A: I don’t think any level is sacrosanct but the market could be settling for the near-term in to a 7,200-7,700 kind of a range. I did mentioned it last time as well or time before last I think this is a phase where the markets had those crunching falls and after such big falls in the market globally and in India, they often go through phases of some kind of consolidation. That could have many reasons globally, because there has been a spate of dollar weakness globally and that might have raised the hopes of some of the emerging markets. 

It could be because we are just in the global mayhem we may have forgotten that we are two weeks away from what is seen as the most important event on the market calendar the Budget. The market may just have to want to wait and see that event out.

 May be there is some hope springs eternal but they might be thinking that something in the Budget might be good and turns a sentiment around and therefore should we sell before the Budget or just hang out and see what the Finance Minister has to say. 

On all this accounts it is possible that the market goes into a range. It could be a 400 point range, 7,300-7,700 for the time being. So, I agree with you that in the near-term it is not impossible but it looks unlikely that- that 7,250 level will be taken out unless there is the fresh burst of global mayhem. So, we could be in a range for a few weeks may be even a month.

 However, that is not unexpected because these kinds of patterns usually follow first the fall, then a range and the next move up or down for the market. So, to answer your question and I would be surprised if before the Budget we break 7,250 and go lower. 

Latha: You don’t give much of a chance for an upside? 

A: I said 7,700-7,740 that was one of the floors for the markets before it went down to retest that 7,500 low. I think given earnings, given the global backdrop you saw what was happening with technology in the US on Friday.

So, mood is very jittery, holding a range is not the worst outcome in the kind of global backdrop that we leave in. So, if we can work our way back slowly to 7,700-7,750 it would be a job well done because it would be almost 500 points from the recent low. So, I wouldn’t keep my expectations too much higher than that for the time being. 

Latha: For the year itself does it look like Nifty will peer 7,240 for a slightly longer-term player, for a year how does the earnings seen and hence this stock market look like?

A: It is my guess, it is no more than that and it is as good as anybody’s guess because these things are very difficult to predict. A lot of people thought 7,500 was the bottom which the market might grind out more in terms of time. However, that level will hold out and that did not. 

My guess is that 7,250 may not be the final bottom for this market. It might hold for a while because 7,500 too held for a while. Remember that it held for many months before it broke.

 So, it is difficult to predict how long this will take but it wouldn’t surprise me if the Nifty sort out lower levels during the course of the year over the next three-four months. So, may be sub 7,000 levels are not impossible given the kind of global predictions we are hearing. 

So as I said the best case scenario for the market is to hang out in a range but my fear is that at some point those levels my might go and you might see lower levels for the Nifty during the course of the year. I would be happy to be proved wrong but right now the way the global scene is playing out I think it would be brave to predict rate upsides in the market. 

I would also like to add that I think this first half as I have said before the first half of 2016 looks like it will be a phase of great opportunity for longer term investors. By that I don’t mean that the second half will be a rocket and a market will go to 9,000 plus a lot of people are saying.

 However, you will probably find valuations in the first half of 2016 in the range that you long-term investors would like to buy stocks. That is not a prediction of short-term gains but entry valuations after a long time will be very mouth watering in the first half of 2016 and investor should be cognisant of that.

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