Oil is not yet fully priced in stock market’

Large-caps look a better choice: Mitesh Mehta, Enam Securities

Chennai, June 26

Markets are battered. Thanks to the two-digit inflation and three-digit oil prices, Sensex has lost 33 per cent value from January highs. "While most of the fears have already been priced in, if oil rises, it can spook the markets again," says Mr Mitesh Mehta, Head (Institutional Sales), Enam Securities Direct.

The Business Line caught up with him on the sidelines of a presentation on equity markets, which also marked the official launch of wealth management and privilege client services for high net-worth investors in Chennai. Here is his take on the way forward for stock market, inflation and specific sectors.

Outlook on markets

Well, to be very honest, there is no a sure-shot call from here. But I think we have seen most of the correction taking place in the market. So basically now, time is the issue — from when markets start moving up. We feel that most of the negatives are priced in. But, if oil really blasts out from the current levels, markets may go down. We need to wait for a while to take a decisive view.

On inflation fears

The market has already factored in (inflationary pressures)and it may not present a further shock, which may pull the markets further down. While markets have corrected substantially because of inflation and oil, we feel oil is not yet priced in fully. So, basically, the focus should be more on the oil side.

Some downside left?

It will be difficult to give you a number such as 10 or 15 per cent. We really don't know how far the oil is going to go. If oil goes above $150 a barrel or even higher, we might have a serious correction on our hands going forward. We think the (stock) markets are negatively correlated with oil.

Investors should…

The best advice for an investor, who is looking at the market with a one-year perspective, would be to bet 30-40 per cent in the equities. It's a good time for them to shop. He/she should have money so that they are prepared to buy more if the markets correct further from here. We would advice investors to buy stocks, which are available at great prices. We think the entry point is crucial. What is good is no more an issue, but the price sure is.

Index or companies?

The market is in such a phase that to give a Sensex bet is going to be difficult. Being optimistic, 15-20 per cent upside from current levels should make me happy. Individual companies are a better play. Sensex would have lot of IT and banks which have lost value. FMCG, on the other hand, even if does well will not show up so much on the benchmark. Stock-picking is advised, rather than a Nifty or for that matter, Sensex.

At this point of time, large-caps look a better choice. The others (mid sized companies) would have problems in raising money. Servicing their debt at 14-16 per cent (per year) would be a big issue for smaller companies. If one's call goes wrong, one would easily exit from large-caps. In mid-caps and small-caps, the exit option is limited, even when it comes to booking profits.

Preferred sectors

We think investors can get good bargains in certain sectors. Banks have been battered very badly and provide good opportunity for entering. For contrarians, the best bet would perhaps be cement, which as we know is presently viewed with pessimism. I would like to stay away from real estate, since there are a lot of execution issues and properties would be difficult to sell. IT sector is more related to the dollar-rupee. IT has a lot of overheads and a global slowdown could affect them badly. As a business, I am not extremely bullish on them.

Banks, power, auto?

Bet more on the PSU banks. Exposure to real estate and agricultural loans is a crucial factor to look at. Higher exposure enhances risks of such stocks. Power has been de-rated and is expected to stay like that for a while. For auto, I don't think people would stop using cars because of fuel. Input prices have risen, but they will be passed on as we have seen.

Pharmaceuticals

It appears to be a safe haven, but is fully valued. Pharma as a sector is valued at 20 price-to-earnings multiple, while companies from other sectors are available at 5-10 times. Plus, why would one want to look at a sector with such high valuations, especially when a number of them have a lot of internal issues as well as concerns on sustainable growth? It's more of a defensive play, but at this juncture looks less worthy of the premium that it demands.

On FII inflows

Dwindling fund inflows is a worry but I don't see any other country challenging India's position. As soon as all this noise goes down, we will see fund managers looking back at us with more interest. We will still grow by 8 per cent and money always chases growth. Globally, as soon as the dust settles down, the money can come in pretty fast.

8% growth still achievable?

I don't think we will have a problem this year. If at all there is a problem, it might be next year, when the elections come up. In such times, a lot of important issues go out of the window