Averaging is a bad instrument in falling market: Kishor Ostwal

Interview with CMD, CNI Research

As we come towards the end of Smart Portfolios' fifth season, Kishor Ostwal, chairman and managing director, CNI Research, tells Jinsy Mathew even though his portfolio may be in the red currently, his strategy to remain on the sidelines will prove good as averaging is a bad instrument in a falling market. Edited excerpts.

After a series of buys in the first half of the season, you have preferred to remain on sidelines. Why?
Post-Budget, the market has become choppy and BSE 500 slid to multi-year lows. This generally happens in a typical bear market. Economic data kept on deteriorating and the hope of a rate cut dashed. The rupee kept on sliding even when inflows were huge. All these clearly suggest that something is seriously wrong in the market and hence, I have decided to remain on the sidelines. The hope of a revival was the only reason to stick to the core portfolio.

Many of the stocks you currently hold have been bought at the start of the year when the markets were trading higher. Why didn't you average it down in the current market fall?
For the reasons explained, it was not wise to average in a falling market. Also, note that the breadth of the market is very bad as more than 90 per cent of retail traders and investors are out of the market. The call put mechanism is not helping investors. After MMTC OFS (offer for sale), investors are scared of public sector stocks. Averaging is a bad instrument in falling market. Averaging has to be done in a rising market.

What do you intend to do with the cash you hold in your portfolio?
So long as markets do not give enough comfort of sufficient upside, I would prefer to hold cash.

There are hardly any Sensex stocks that you hold. Any particular reason why you avoid those names?
I predominantly track and understand mid-caps and small caps. I do hold some Sensex stocks like RIL (Reliance Industries Ltd), which is in fact doing well. My theory of investment portfolio is for retail and large segment of public and not FII (foreign institutional investor) hence, by and large I avoid Sensex stocks.

Oil and gas names appear significantly in your portfolio. What's the reason for being positive on that space?
Gas price revision and petrol/diesel decontrol were the basic reasons. But even these stocks failed to perform even though fundamentals suggest huge rise in earnings due to decontrol. This again suggests that the market do not work on fundamentals every time.

What's your expectation for the upcoming result season? Which are the possible sectors that could surprise on the upside?
There are no great expectations. Earnings may grow at eight per cent vis-à-vis last year. Information technology (IT) and export companies may report good numbers; yet, the rupee fall could be a surprising catalyst, which may eat the bottom-line for currency losses.

Is the worst over in terms of FII selling?
I do not think so. Their selling has no rationale, which proves that they buy and sell with a clear intention to make short-term profits within the settlement in the futures and derivatives. Logically, falling rupee should be a carrot for bringing in more flows. But we have always seen that there is no correlation of FII action versus the rupee.

When the inflow was as high as $19 billion in first four-five months of this fiscal, the rupee did not appreciate. However, a meagre $4 billion outflow has seen the rupee to tank by 11 per cent, damaging the entire national economy. This proves a point that nobody is convinced about the India story and that the FIIs are always in search for triggers to short Indian markets and currency.