Don't enter mkts now, wait for fall: First Global

Q: We have seen many of the beaten-down sectors, particularly the commodity space leading this pullback in the market. Do you think they are overextended now or is there genuine cause for optimism in those beaten-down sectors leading this rally?

A: I think that has been a bit of a cause for concern for this rally if it was a true bull market rally it doesn't always come from the worst sectors where the bad news hasn't ended.

As far as commodities are concerned, in certain cases the move was so sharp and overdone that there had to be a bounceback. If you look at copper, copper goes down 70% and bounces back substantially from those levels but it is still down only about 50% from the peak.

Steel also had a situation where production plummeted much more than the industrial production for the world simply because there were inventories that had to be cleared out and now that they have been cleared out one will see a bit more of the production going up.

So, you have those kinds of technical factors. That still doesn't mean that the negatives are over. If you look at oil even now the IEA (International Energy Agency) is predicting about an almost a 3% drop in oil demand. So, that is very huge considering that its CAGR (Compound Annual Growth Rate) in the first place used to be in the 1-2% range. You are talking a 3% drop now. So, when you have a very sharp drop, you will see some rallies whether it is in demand or in prices. But that doesn't mean you are out of it yet.

Q: Starting the day after tomorrow, we will step into earnings. How much damage do you think Q4 earnings could do, or is most of that figured-in and in the price right now?

A: Overall as a general principle we had rallied ahead of the earnings season. We had rallied ahead of the elections, which is never a good thing overall.

But as far as earnings is concerned, you will see a mixed bag. You will see a couple of sectors that will do better than in Q3, probably cement and parts of auto - not commercial vehicles but other parts of auto - might do a bit better.

Refining margins should be up this quarter. So, that should be good news for Reliance. But on the other hand there would be sectors like banks which were in a sense the saviour the last time around because of the investment book. This time that whole thing would be on the reverse side that you will have right now on the investment book.

So, it would be a kind of a mixed bag. I don't think in terms of the general earnings trend you will be out of the words in this quarter because again some of the things that have done better this quarter will see a downturn next quarter.

So, FY10 is still not going to be good news on the earnings front. Aggregate may not mean much because a few things can skew the results here or there in terms of the overall aggregates. Plus you had the accounting change on accounting for FX losses. So, that might again - the reported earnings may not give you the full picture. You really will have to disaggregate and see what is really happening.

Q: How would the market react towards the L&T stock if L&T went on to win Satyam? Do you think it is fully priced-in or could you expect some reaction?

A: It is hard to say how the market would react at this moment. But the more important thing is that what is the impact on any successful bidder, whether it is L&T or anyone else? I think there really the risks are still very high.