SENSEX NIFTY
Dec 28, 2012, 08.23 AM IST | Source: CNBC-TV18

Budget 2013: Dull earnings-growth casts pall on bull mkt hopes: Experts

Independent market analyst Girish Pai explains, in his analysis on CNBC-TV18, that a boost in the growth in earnings was vital for a bull market as proved by the bull markets in 2003-2007.

Independent market analyst Girish Pai explains, in his analysis on CNBC-TV18, that a boost in the growth in earnings was vital for a bull market as proved by the bull markets in 2003 - 2007. In his opinion, the current rally is more cyclical in nature driven largely by consumption. However, the boost in earnings-growth will occur only when all the four drivers kick in- consumption, investment, improvement in global commodity cycle and boost in exports.

Technical expert Sudarshan Sukhani of s2analytics.com adds that he does not recommend any intraday calls on the absence of day's or half-day's follow-through. "The signs do not justify the taking of any kind of position. The markets are in stuck that narrow and tight 70-point trading range of 5850-5920. The only trade I suggest is to go long on the CNX-IT Index which is facing a dip."

Below is the edited transcript of Girish Pai's analysis on CNBC-TV18

Q: There is the camp that believes that the market is headed for higher levels in the first month or two of 2013 while another camp estimates that the market is in a grind and will go through some level of consolidation going ahead. Where do you stand?

A: The 7-10-percent returns expected to be offered by the narrower indices especially the Sensex and Nifty in 2013 could probably take the markets to the high. And that is not very far off and I think it may probably happen in January itself.

But I don't see markets going into a secular bull market. There is a widespread expectation of being at the beginning of a secular bull market. My opinion is that the markets are in a cyclical rally right now. Some of the positive indications such as valuations ruling at 14-14.5 times forward as compared at the start of 2012 when valuations ruled at 12 times and expectations of better GDP growth, lower interest rate, lower inflation and slightly better earnings growth are all being factored in right now.

If markets have to head much higher from the 21,000-levels, one of the key factors besides liquidity that needs to significantly change trajectory is the growth in earnings. The expectation still rules at a high single-digit to low double-digit growth for the Sensex in 2013 and will possibly continue till FY15.

So, I think it is a cyclical rally largely driven by consumption. Strong growth in earnings is going to come when all four drivers of earnings kick in- consumption, investment, improvement in global commodity cycle and boost in exports. This rally should probably top out sometime in January.

Q: What is your expectation of the January earnings season?

A: The effect of the growth in earnings on the Sensex over the next few years is probably going to be in the low double-digit range which is not adequate to cause a considerable impact on the market. The structural bull market in 2003 - 2007 was supported by growth in earnings compounding at over 25 percent.

So that is the kind of growth in earnings required to kick-start a structural bull market. And the growth in earnings is nowhere near those levels. For the December quarter the growth in earnings will be in the high single-digit range and is broadly inline with expectations for the full year.

Q: If this market does have another upside leg left, where do you see the momentum coming in from in terms of individual sectors?

A: The momentum, at least a 7-10 percent upside, would potentially come from the banking sector. But for stronger portfolios in 2013, there needs to be a Budget that focuses largely on fiscal consolidation, sends interest rates down and causes the investment cycle to pick up.

Till that event occurs, I would be overweight on sectors which have done very well in 2012 along with the high-quality consumer stocks, the high-quality bank- and pharma stocks. I would be defensive in 2013 and I think that will pay off because I am expecting the market to offer close to high single-digit returns followed by a lot of events which could potentially act as negative triggers.

There market expects a cut in rates by the end of January but in my opinion the RBI strongly hinted on a rate cut in the first-quarter. However, inflation is not at comfortable levels at this point in time.

The RBI will observe the Budget's focus on fiscal consolidation in FY14 before taking any initiative on rates. So that is a trigger that one needs to watch for. Other factors include the fairly large capital issuance calendar both from PSUs as well as from the private sector which would absorb whatever liquidity flows into the Indian market and the threat of a rating downgrade.

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