Earnings to disappoint, midcap revival tough: StanChart

The market is expected to remain challenging in the near term on the back of worsening macro economic situation, says Dhiraj Agarwal of Standard Chartered Securities, in an interview to CNBC-TV18.

He also pointed out that the upcoming earnings season may disappoint and the market may trend downwards. He says broader markets will continue to stay downbeat for the rest of the year, or atleast for the first half of the year.
"On sectoral front, earnings of the IT companies in the fourth quarter are expected to be better compared to other sectors," Agarwal added.
Also read: Investors shun emerging market equity funds: EPFR Below is the edited transcript of his interview to CNBC-TV18. Q: The March series was flat, but individual stocks did not do very well. What is your feeling going ahead into earnings season?
A: On the whole, the earnings season is more likely to disappoint rather than throwing any positive surprises. The markets will continue to remain challenging as we move into the earnings season. Q: Will the market continue to trade in a range or do you see a bit downside this month?
A: It is difficult to call on a month-by-month basis. The risk is more on the downside. The bipolar nature of the market has become extreme these days, so there are large bunch of stocks which are breaking 2008 lows and yet index is within 10 percent of its all-time high. This has made taking an absolute call on the index a little bit challenging, but as the earnings season does not look very rosy there should be a pressure on the downside. Q: Do you expect wealth destruction in the broader market which affects more people than the Nifty to continue for another quarter or do you think most of the downside has played out in the broader market?
A: The risk continues for a while more, maybe more than a quarter because there are no signs of economic revival at this point. Both micro and macro data are disappointing. The macro economy has worsened at the margin despite great attempts by the government in the last quarter of 2012, this indicates that the broader market earnings will continue to disappoint and remain under pressure maybe through the rest of this year or least for the first half.       Q: The market has lot of expectations from the IT sector and it has infused in lot of money. How will this sector perform in April?
A: By and large the sector has performed better with decent business traction. As the broader market is under pressure, investors are left with few avenues to invest so some sectors are getting disproportionately benefited as compared to the others in terms of either the valuations or the stock prices and IT sector falls in the first bracket.       
The earnings are in the region of 14-15 percent which is not spectacular, but looks excellent relative to the other sections of the market and that is pushing the valuations up at the margin. So I think the trend continues. I do not see any reason for reversal of the trend in the near future. Q: In March, the markets did not do well and midcaps performed very poorly, the Foreign Institutional Investors (FII) infused in nearly net Rs 10,000 crore into the market. Do you see that being in place as we roll forward in the next quarter?
A: I have not seen too much of a reversal in the FII investor sentiment. As of now there is no dent in confidence. By and large the FIIs are taking a positive view on India with hopes that all the actions and the announcements the government has done in the last quarter will at some point of time bear fruit.
_PAGEBREAK_ Q: Conversely, the domestics pulled out nearly Rs 8,000 crore in March. Is it making place for some of these divestment issues from the government or is there a deeper problem there? Have redemptions accelerated? What is happening with domestic flows?
A: I think there are redemptions but it is difficult to get an accurate data because of the nature of the market. Although accurate data on the mutual funds is available but no accurate data on insurance and government-owned insurance companies is available.  
From YTD domestic selling has happened to the tune of Rs 18,000-19,000 crore. I do not think people are raising too much of cash for divestments or otherwise. Q: What is a good way to approach this market now? Is it still a market which should be bought on dips because the second half will turn in a bit of a trend turnaround or do you think the market will be difficult to make money out during the course of the year, so investors should not rush to buy stocks in every fall?
A: The best way to trade in this market is to take two or three a year call. In absolute terms, it will be difficult to make money this year. In relative terms, one can seek relative comfort in IT, FMCG, pharma and a few other select names. Investors should look for high quality companies available at fantastic valuations and slowly accumulate. Q: The cuts have already borne through on a consumption sector like autos. Are you confident that spaces like FMCG can continue to perform or even maintain volume growth that we have seen in the last few months?
A: It is a relative view. In absolute sense, growth trend is down across consumption sectors including FMCG. So, making absolute money this year will be tough. Q: Auto stocks have fallen quite a bit. One can understand the domestic focused autos like two wheelers and cars are doing badly, but even globally exposed companies like Tata Motors have come off significantly. How do you read that?
A: For Tata Motors, last quarter was a bit of an eye opener. All of us got an impression that domestic business does not matter because the global business accounts for more than 90 percent of the profits. I do not think our brain was tuned to the fact that the domestic business can churn in a large loss.
So from being 5 percent of profits, it straightaway went into Rs 600 crore of losses in last quarter. So the swing in the overall consolidated profitability was to the tune of 15-20 percent, which is large. As long as the domestic business is doing nothing, the global business should drive the stock price, but if the domestic business swings then it is a challenge. Rs 600 crore of loss in a quarter is not insignificant by any stretch of imagination. Q: Have the private banks corrected enough in the series we have closed up or do you think that still remains a vulnerable pocket?
A: Relatively speaking, private banks should be a safer bet within the banking sector. It is a huge weight in the index, so investors cannot fully ignore it, especially the institutional side and with the Non-Performing Loan (NPL) pressures showing no signs of abating, the banking sector allocation part of the institutional money will continue to prefer private banks more as compared to the PSU banks, so relative out performance can continue. We have seen some correction which should be a good opportunity to enter. Q: What is your view on the capital goods space into this earnings season, not construction, but the blue chip faces, like Larsen and Toubro (L&T)?
A: The capital goods sector reflects the progress of the economy and at this point of time it is showing a slowdown in the investment cycle. L&T is relatively better placed as compared to the entire sector at this point of time. So, investors are exposed to this stock in this space.