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Outlook for Equities

Leading equity fund managers give their views on the current valuations, outlook for equities and their picks. The consensus is built around the strong attractiveness from valuation standpoint.

The sharp slide in equity markets post September 11 has got investors worried. Already reeling under a bear spell, the Sensex has just wilted in the last fortnight with a loss of 565 points. The near 18-per cent shave has vaporised market capitalisation worth Rs 90,000 crore. Frontline technology stocks have bore the brunt, with fears that an imminent recession in the United States will further pull down growth estimates and impact bottomline. Last year's fancied technology funds are today in an abyss with an average loss of over 75 per cent. Surely, most investors consider these funds no more than a dead investment.

In the current gloom, Value Research spoke a cross-section of equity managers on their outlook for the equity markets. Most fund managers believe that the current valuations are near perfect for cherry picking. This is also amply reflected in the transactions, with equity funds net buyers in the current month. Yet, the immediate future is fraught with uncertainty and fund managers do not want to hazard a guess on the downside. In a market, which has been gripped by emotions and fear psychosis, rationality is surely on the backburner.

Bharat Shah, Birla Mutual
On further downside from current levels
I have no particular view as to where the index is headed, whether up or down. Our approach has always been stock specific. As far as some individual stocks are concerned, I do believe they have become attractively priced and hopefully, should not have any significant downside from current levels.

His current choice of stocks or sectors
Our investment approach has always been bottom-up i.e. stock specific rather than top-down which is sector driven. Having said that, we do like some select businesses in pharma, consumer businesses and technology sectors, among others.

Anup Maheswari, DSP Merrill Lynch Mutual
On further downside from current levels
It is very difficult to take a call. Until the whole crisis blows over, the market could continue to be lackluster with potential downside. In such a scenario, risk aversion increases and sometimes, it is best to do nothing. We are also not painting an optimistic picture for our investors and we do not see a need to go out and be aggressive even at the risk of short-term under-performance.

His current choice of stocks or sectors
Well, the current market is a good time to invest but one needs to be cautious. We have been making portfolio adjustments and consolidating our technology holdings in Infosys. We are also taking larger positions in more defensive sectors like pharma, cement and utlilities. The focus currently is on picking up liquid stocks with strong fundamentals.

S.N.Rajan, Kotak Mutual
On further downside from current levels
I believe that the correction on account of deteriorating fundamentals is more than done. The further weakness we are seeing is solely on account of fears on how we see the military events unfolding. Obviously if the ongoing escalation is going to be a long-drawn affair it will be difficult to justify staying invested in equities. If things return back to normal we will see a strong rebound.

His current choice of stocks or sectors
Going forward it will be critical to maintain a diversified portfolio in one's equity investments. The risks of bias to a hot sector can be very high. Diversification of ones portfolio will be the key.

Siva Subramanian, Pioneer ITI Mutual
On further downside from current levels
If one looks at the valuations and fundamentals of the Indian economy, rationally there is no downside from current levels. But given the fluid situation, psychology and emotions have taken a grip over the markets and hence if there is anymore FII selling, the quantum of downside is anyones's guess.
His current choice of stocks or sectors
At current levels, valuations across sectors look attractive even after factoring in the impact of the US attacks. While it is tough to take a sectoral pick at these levels, we feel that government's initiatives on economic reforms front in order to deal with the international certainty gives an edge to PSU stocks.

Prashant Jain, Zurich India Mutual
On further downside from current levels
In my opinion the market is somewhere close to the bottom. It is nearly impossible to forecast the market in the short term and the present situation is no different. However, in my opinion, over the medium term, the ratio of potential upside to potential downside from the current levels is quite favourable. Hence it is advisable to invest in equity and related products. Investment should however be phased out over a few tranches to reduce volatility.

Typically, the markets have in the past fallen / bottomed out in advance of the actual event. Thus in the event a conflict commences, it is likely that the market starts rallying. This is probably because uncertainty is worst than adverse developments themselves for the market.

There is no doubt that barring some segments the markets are extremely cheap. Unfortunately some of the large weighted stocks in the indices are still not so cheap. This could result in some pressure on the index.

His current choice of stocks or sectors
The sectors we like are automobiles, cement, some engineering stocks, oil refining and marketing, Indian Pharma and select FMCG. Of these the valuations of the Indian Pharma companies are probably the highest but then so are the growth prospects.

Some of the preferred stocks in these sectors are Ashok Leyland, Bajaj Auto, ACC, Grasim, BPCL, BHEL, Cipla, Ranbaxy, Dr Reddys, Smithkline Consumer, Asian Paints etc. Each of these companies is a strong player in the respective industries, has a reasonable track record and sound management, focus on core competence and attractive valuations relative to the growth prospects and the nature of the business. Some of these companies are available at 6-8% dividend yield, which points to severe under-valuation given the present interest rates.