Don't be sector specific, invest in largecaps: Emkay

Kumar Karwa, MD, Emkay Global Financial Services said one should retain equity and not get into cash. However, he advices to move out of poor managements' stocks, book losses and get into largecaps. According to Karwa, one should not be sector specific, but be broadly invested in to the largecaps.

However, timeframe is more important and one needs to be invested across timeframe, rather than looking at three to six months, Karwa added.

Here is a verbatim transcript of the exclusive interview with Krishna Kumar Karwa on CNBC-TV18. Also watch the accompanying video.

Q: Any sign of a bottom yet or we are still groping?

A: The search for the bottom is eternal and rational investors shouldn’t be trying to look at bottoms and similarly when its time to sell, should not look at tops. There is too much of pessimism around and nobody knows when the selling will stop from FII’s, how this global recession etc, is going to get impacted. Investors, the domestic ones, should start looking at sheer valuations and not worry about earnings, as it is very difficult to predict at the current economic turmoil. But valuations even at Nifty itself, many of the stocks are quoting at book value or below, and if investors look to invest in these stocks knowing fully well that after they buy there will be a 15% to 20% of a fall and with a two year outlook, then this is the right time. But if you are only going to wait for bottoms, and the markets move up 10%-15%, then we think the bottom has been formed, but till then we are just searching.

Q: Where do you think the market will be at though by December end, somewhere around these levels or do you believe there still might be a chance for a biggish rally by the time we close up the year?

A: This is a very short term perspective, that’s the problem with investors that are trying to time the market as to where the market will be tomorrow or in the next one month. If we keep on looking for a one month cue etc, we will miss the big picture - which you need to be investing when the markets are closer to 60-70% fall that we have witnessed in the last one calendar year. I don’t know where the markets will be in the next one month and after seen a bad October and reasonably poor November maybe there could be some up tick in December, that’s a distinct possibility but its more from a trading perspective.

Q: How long do you think this whole rebuilding process will take if its not tomorrow or not the end of the year how long do you think the markets are going to take to show any big recovery or any process of rebuilding?

A: As far as corporate India is concerned, the next two quarters are going to be tough for them in terms of the impact of higher raw material prices, interest rates, slowdown in demand etc. The whole rebuilding process will be at least 12-18 months and stock markets typically tend to discount things at least six to nine months in advance. So closer to next September is the time when you should start seeing upticks in markets and confidence rebuilding exercises happening, if things pan out as expected in terms of the effort by all global central banks and US bank, to pump in liquidity and improve systems and even our domestic government in terms of improving liquidity. So the positive impact of all these actions should take at least a year if not more.

Q: Which clusters of stocks would you focus on now if you are trying to build a portfolio using this crash for the next move up?

A: In this environment it doesn’t make sense to be sector specific because if I look at each and every sector, I can give you 10 reasons to be negative whether it’s IT or banking or capital goods or commodities, each sector has its own issues. So the point is that this is the right time to invest into basket of stocks maybe an exchange traded fund on the Nifty or on the Sensex and that’s the best way of staying invested in equity in these times when there are too many cross currents. And once things start clearing out then you can rotate that money in stocks or sectors that you feel will outperform. Today the basic fear is whether equities as an asset class whether you want to be there? I am very clear that this is not the right time to move out of equity and whatever equity you have, we should retain that and not go into cash and if you have stocks of poor managements move out of them and book your losses and go into largecaps which will be far more capable of facing the economic uncertainty in the next 12-18 months. So do not be sector specific and be broadly invested in to the largecaps.

Q: What kind of asset allocations would you recommend for the next year or so how much would you put in equity and how much into other spaces?

A: Asset allocation is a function of the risk appetite, to deploy fresh cash into the market it’s very difficult because of the economic uncertainty around, so it’s a very specific individual decision based on individual’s asset allocation and risk appetite. But you should be also looking to do systematic investment and be ready to take at least a 15%-20% notional loss on your portfolio, because the environment is still in a flux and we don’t know when the economic environment will improve. However, timeframe is more important and you need to be invested across timeframe, rather than looking at 3-6 months. And if you are having a view of atleast two years then this is the right time to start building up your portfolios.