State doesn’t see swing play as a paying proposition

It pays to be a picky eater, suggest market watchers, though hardly a mom will agree. Those who had invested at the bottom of the market may be strutting their multi-baggers, but given the level the market is in today, a full course meal, read momentum play, may be off the dietitian’s prescription already.

“The influence of the market (read: macro) on stock returns has been high over the past 18 months with stock-specific idiosyncratic factors taking a back seat during this period. With the pace of returns likely to slow in the coming months, the key question is whether it is the right time to abandon macro over stock picking,” Ridham Desai and Sheela Rathi of Morgan Stanley noted in a November 23 report titled ‘The Stock Picker has a Job’.

“The dispersions in fundamentals, valuations and stock returns all appear to be at middling levels. Usually, extreme dispersion is necessary for a very attractive stock picking environment. The bottom line is that the micro environment is not very appealing for stock picking. That said, as growth accelerates in 2010, these micro indicators are likely to change in favour of stock picking,” Desai and Rathi noted in the report.

Other analysts seem to support that view, what with returns from momentum calls in sectors drying up and investors switching to safer sectors.

“The markets are fairly valued and it is highly unlikely that there would be bargains to be found on a sector-by-sector basis. Within specific sectors, one could find that there could be specific stocks that are overvalued, which it may make sense to exit. At the same time, other stocks, which have strong fundamentals, would find buyers,” said Saurabh Mukherjea, head of Indian equities at Noble group.

The market’s run-up from the lows has been fast and furious. In the last 7-8 months, an improving macro environment has led to a rally in global equity markets. But at 17,000 Sensex levels, the market is too mature to leave room for sectors to be unrecognised, say analysts.

“Stock selection is making a difference in the kind of returns that are generated. As the maturity of the market rises, the unrecognised stocks need to be looked at for generation of returns,” Dhiraj Sachdev, head of PMS at HSBC Asset Management.

Going by the experts, while we may see the market move 10-15% higher from here, the pace would be slow. Hence, rather than go in for a pure sectoral play, it might make more sense to go for stories that are likely to hold for a while.

“No large sector leader is attractively priced. One will have to go in for broader themes, with a focus on secular consumption stories,” says Neelesh Surana, senior fund manager at Mirae Asset Global Investments (India) Pvt. Ltd.

None of the top four sectors in terms of absolute returns since the Sensex hit its March low figures in the list of returns since the index hit its high on October 17th.

The BSE Realty index, which had risen 259.6%, has dropped 22.89%. The Banking index, which rose 190.6%, has dropped 6.04%, the BSE Capital Goods index, which rose 161.6%, has fallen 8.05%. The metal index, which had gone up 255.6%, has also fallen slightly by 0.42%.

Part of this can be attributed to a sectoral churn in preference of safety over momentum, as investors switch to stock-picking for generating returns.

“We are shifting out of the high-beta stocks,” said a fund manager with a large domestic mutual fund, requesting anonymity.

Tellingly, the so called defensives FMCG and healthcare indices have been amongst the top performers since the market hit its high, rising 2.45% and 5.74%, respectively.

Market watchers believe that as growth accelerates and results for the third and fourth fiscal quarters come in, differences in fundamentals will become more apparent and returns in the individual stocks will begin to reflect the same.