Markets: More correction required

Kirsty Watt, investment manager of Asian and Global Emerging Markets at Martin Currie states that they did not sell during the market correction, and that the Indian market needs a longer correction for valuations to be attractive.

Watt adds that they like Bharti and TCS. They believe that HDFC, ITC and BHEL look oversold in the short-term.

Watt comments that they are worried about government measures on the cement prices. They are positive on ITC, however they feel that the VAT concerns are overdone. They do not hold any midcap stocks in India, adds Watt.

Excerpts from CNBC-TV18's exclusive interview with Kirsty Watt:

What have you made of the past two weeks for emerging markets? What is the call on India now?

We are still very positive in our view on emerging markets. We did not participate in the downturn; we did not sell off any of our positions and held on to those stocks that we saw good value in. If anything, we are using this as a buying opportunity to get back into names that we like.

I think the correction was expected and actually seems to be fairly benign compared to the pullback seen previously. We continue to like stocks such as Bharti, TCS and in the short-term names like HDFC, ITC, and BHEL are all looking quite oversold at these levels.

Have you changed your view on the financials of India, because the interest rates have gone up here and banks have turned under performers in our market? Have you changed any of your views in the light of rising interest rates?

We did not hold many of the banks, and I have got two to three concerns on the bank. The first is temporary, in the sense that inflation will start to improve at the end of April. We could see the banks start to run on the back of easing inflation and easing interest rate pressure. I think the underlying momentum in inflation is upwards, which will hurt the banks going forward.

The second concern relates to inventory buildup in motorcycle side and from what I am hearing there is a slowdown in demand for mortgages and for certain personal loans. This has been a huge driver for banks like ICICI. For the longer term, I would be steering clear of these banks but in the short term we could see them pop up post a sell down.

There have been some concerns on the material space like cement and steel stocks. Did you have an opportunity to change your portfolio weightage to that and sell out from any of them?

This is an area I am quite concerned about. The cement players are playing quite a dangerous game with the government; the way they continue to try and push their prices higher, I would be worried about what measures the government could bring in to hold the price rise seen from these players. It can make the environment quite difficult for them.

Similarly, on the steel stocks, I would be avoiding some of these names at present, whether there is government pressure to cut prices, so we don't hold any of those names.

You do hold ITC, a stock, which has been a great under performer. What do you think is wrong with it?

I think VAT concerns are slightly overdone, and we saw nothing coming in through the Budget. I sense that the overhang will stay in place until we get clarity from the government on what is happening on that issue.

I was encouraged to see the price hikes coming through that is positive news by the company. I think the underlying momentum is good; the sales momentum is strong and what we are seeing in other businesses like the hotel side, on the retail rollout, etc, was extremely positive; they are positioning themselves in the right niches in India.

I hope it is just matter of time before the market starts to recognise what is actually happening in the fundamentals of the company and starts to pick the stock up because it has been a big under performer, not just in the recent move but the whole of last year.

Do you hold any midcaps and what have you done with those positions?

I am afraid we are not holding any midcaps; we continue to stick to the larger, more liquid names where we see very good value emerging - stocks where we continue to see good outperformance, strong earnings upgrade coming through, companies beating expectations and also wherever there is a very strong cyclical and secular story. Those would be names like Bharti and TCS, which have been already mentioned.

Some of your peers have been mentioning concerns about India's valuations. Do you think those have been addressed by this fall, or do you see a valuation risk to the Indian market even from these levels?

It is interesting; you should bring that point up. Previously, we have never been worried about the valuations in the market. We have always felt that the growth justified the PE; this is the first time where I am beginning to feel that the growth expectations itself are very optimistic and hence, if you look at the market on the PE to growth basis, it is much harder to justify than in the previous years.

So I think the valuation argument does stack up against India and maybe we need to see a longer correction in the market for things to adjust to a more attractive level or at least for the market to go through the period of consolidation.

You made the point about two-wheeler inventories. Is it worrying that maybe the whole consumption growth paradigm might be just beginning to weaken a little bit or is it too premature to draw such a dire inference?

I think clearly there is an overwhelmingly positive secular story in the two-wheeler side, the mortgage side and the autos, which is well known. My concern is from just the cyclical side and I wouldn't be surprised if we do see a surge like slowdown. The numbers that we have been seeing in terms of growth have been absolutely phenomenal.

So, at some point we would have to expect that the delta of the growth is going to come off. I wouldn't be surprised if we start to see this coming through now, because prices across both - houses as well as loans have gone up and even though wages have gone up, the wage increases haven't matched the cost increases that people are seeing.

Do you put out any full year targets for the Sensex as well and have you heard many downgrades, upgrades, neutral and any changes in status?

Actually, we haven't seen any of that yet. I guess we will have to wait to see for the full year numbers and then we will see whether there is any downgrade coming through. As I recall, post the December results, analysts were fairly neutral, as even the company's guidance is very healthy. So we will wait to see what happens on the upgrade-downgrade position in April.

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