ECB meet, Q1 earnings to determine market direction: Emkay

Indian market is on an uptrend waiting for the government to announce some reformative measures soon. However, there is also a growing fear that the rally is short lived and will die down soon. Krishna Kumar Karwa of Emkay Global Financial Services, too feels that fundamentals are not supportive of a strong rally from the current levels.

According to him, the European Central Bank (ECB) meet and first quarter earnings of FY13 are likely to determine market direction now. Both the Bank of England and European Central Bank monetary policy is scheduled tomorrow. The BoE is expected to resume its asset purchase programme while the ECB is seen cutting interest rates by 25 bps.
In an interview to CNBC-TV18, Karwa said, "After having moved almost by 8-9% in the month of June the market is in a consolidation mode for the last three-four days. It is waiting for further global cues to take a sense of its direction. Investors and traders are cautious and wouldn't want to take any aggressive risks."
At the same time, he also believes that midcap is likely to continue to outperform as domestic institutional investors (DIIs) are active in the sector and are willing to take small bets.
As an investment strategy, Karwa recommends MindTree, Hexaware and NIIT Tech in the midcap technology space. Also read: See rally in India, cautiously optimistic: Baer Cap
Nifty in consolidation mode; 5150 key support: ICICI Direct Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying videos. Q: We have had a pretty reasonable pullback for the market. How are you approaching the rest of this series? Do you sense that there is more upside or do you think we are going to get back to some range trading for a while?
A: I think the markets after having moved almost by 8-9% in the month of June are in a consolidation mode for the last three-four days. They are waiting for further global cues to take a sense of its direction. Investors and traders are cautious and wouldn’t want to take any aggressive risks.
I think the result season is on and based on earnings outlook and actual earnings, the market will take a further direction. Also you have the upcoming ECB meeting and the expectations of a rate cut. If something like that comes on and then there is a global rally then we could also participate, otherwise it would be led by domestic factors. Q: Between these global and local cues, the RBI policy, monsoons, earnings or even the global cues that are lined up, which ones would assume most importance now according to you?
A: I think that our markets are primarily driven by liquidity flows which primarily come from overseas. I think that’s a very important factor to look at. Then I think the domestic factors will come into play. If you have to choose between the two, then global liquidity flows will be very important.
Having said that, I would like to bring to your notice that last month we had a 7-8% rally despite any substantial FII or global liquidity flowing into our domestic markets. Sometimes your local valuations become attractive and that creates its own uptick in the market. Q: What's your sense of what we may see first? Do you think it's likely we will see the Nifty pierce the 5600 mark or more likely we get back to that 5000-5200 kind of zone and then the market just drifts along for a while?
A: I don't think we have the foundation for having a sharp rally at 5600. But it would be very, very stock specific and that should be the way going forward, rather than taking a call on Nifty. The markets are becoming reasonably broad in terms of depth, in terms of number of stocks which are performing and have been improving of late. I think investors are more willing to look down just a step below the Nifty 50 stocks. We are seeing a more broad based market of late. Q: Tactically then you are pitching for midcap outperformance this month?
A: I guess so. We believe that there will be a stock specific outperformance, whether it is midcap or largecap. But it would be more bottoms up driven than sectoral driven because on a sectoral basis, you can find negatives in almost each and every sector. However, on a bottoms-up basis there are always stocks which will outperform despite the headwind in their sector. Hence, investors have become very bottoms up and stock specific. Also read: Nifty to break 5270-5320 range either way soon: Sukhani
_PAGEBREAK_ Q: On that point you were making about the midcap space, you also track some of these agri pockets quite carefully. How worried are you about the kind of newsflow that is coming out from the monsoons and what kind of impact will that have both on the market and some of these agri heavy spaces?
A: We are cautious on that side because there are two-three factors which are going against the agri input sector. One is obviously the poor beginning to the monsoon but, more than that the agricultural output prices etc have moved up. But, there is surplus, so the ability of farmers to invest is slightly weakened.
So you are finding resistance on that front. Also even for the agri inputs, the petrochemical input prices have moved up and they are not able to pass on the full extent of the price hike to the end customers. There is no doubt about the fact that they have had a good run and on a long-term basis, we are positive on the sector. But for the coming few quarters, we are slightly cautious on the sector. Q: The one distinctive trend that we have seen in the last many weeks is the kind of outperformance that we have had from the midcap end of trade, if you had to identify a couple of pockets that are looking strong now, which ones would they be from the midcap side?
A: If you look at midcap banking space, specifically the public sector banks, the valuations of many of these small midcap banks is maybe 0.6-0.7 price to book. No doubt there is a reason behind it, but if the results are better than expected then this could be one sector which offers you a lot of support on the downside.That could be a distinct positive upside.
We are also very comfortable with the midcap IT space where we believe that the tailwinds are behind them. The valuations are reasonable and investor interest is there. This is one segment where we believe that from here onwards there could be positive returns for investors. Q7: On that point you were making about the midcaps, one pocket that has seen outperformance has been some of these export related stories, things like textiles, pharmaceuticals, any thoughts or picks from those kind of sectors?
A: We don't track textile so I wouldn't be able to pass a comment on that. But on pharmaceuticals, yes, there should be. We are broadly positive on that sector and the stocks have done well. They should be gainers out of the currency translation.
But, I think just taking a call on any of these stocks based on a single factor should not be the right way to look at it. There are a whole host of other factors which could be looked at but, generally we are positive on the pharmaceutical sector based on their domestic growth expectations and also on their overseas business plans. Q: What exactly has been the nature of domestic interest returning to the market because DIIs still remain sellers, is it the HNI community that is coming back because of this midcap performance, where is the interest coming from right now?
A: There is no new interest. The same set of investors are there so if you are expecting any new set of investors coming either through the mutual fund route or through the direct investing, there is no interest from the new set of investors. It is just the same set of existing investors who are hardcore equity investors and who are seeing opportunities in specific stocks and segments and therefore, they are participating.
I think even the domestic funds are now becoming slightly more active on specific midcaps. Wherever they find value and get decent management and growth prospects, they are willing to take small bets on it. I think it is a combination of domestic funds and domestic investors becoming slightly more active on the midcap space. Q: What is your sense of how we may wrap up this year because we have already put in about 13-14% year-to-date, do you think the best of the market movement is already behind us or do you think we will see better returns by the end of the year than we have now?
A: I think on an economic front, there are going to be challenges and you don't know how it is going to pan out based on oil prices, currency, inflation etc. So the economy is something which could be challenging in the second half of the year. But we hope that it turns out to be better.
On a stock price performances point of view, we are very cautious and we believe that if the economy struggles further, then your earnings growth expectation, which is around 10-12% now could go down further to maybe 5%. It all depends on how the economy pans out and based on that how your stock prices will do.
But we are very careful and I think more than Nifty or rather the broad indices, it would make sense to be very bottoms-up because in any environment, you find that there are stocks which outperform. That is what I think the investors are now looking at because there are always crosscurrents in local and global factors. To be able to take a call on the broad indices would be challenging.
_PAGEBREAK_ Q: What would your expectations be from the telecom sector performance because the regulatory overhang does continue but with the way the stocks have corrected so much, there is a bit of a rebound that we are seeing now on the likes of Bharti etc, would you pick up these telecom stocks?
A: Yes, there has been decent underperformance in the sector for the last few months. They are rightly on various regulatory challenges. Expectations are that maybe as part of various regulatory issues getting resolved, you will possibly get suggestions to the regulatory challenges in this sector.
The valuations have been where they are and probably because of that we are seeing some sectoral rotation into this sector. The stocks have started moving up and there could be some more price performance in the sector going forward. Q: How do you approach sectors with regulatory overhang? The CCI report is out already on cement, it is expected on the tyre companies, any thoughts on how to approach those kind of markets?
A: So far, we haven't seen any of these companies being forced to pay. There is a long process and obviously there was an overhang but, we have seen cement stocks outperforming post whatever announcements have come about.
I guess, this is a good thing that there is the CCI commission and they are coming out with these announcements. But I would say that fundamentals of these stocks would overplay and finally, if there is value then market recognizes the risk and takes it forward. Q: You are still sounding pretty cautious on the market. How are you approaching the events of the last one month or so, another trading rally like the ones we have seen in the first half or do you think there is something different about the move this time around either in terms of finding a base or at least giving the midcaps an opportunity to outperform?
A: I think it is very stock specific, which is what is happening and valuations are what come into play. Markets have generally been very cautious on banking stocks. But, if you look at it in the last six months, many of the stocks have given you 30-40% return. So wherever there are valuations, wherever stocks are reaching trough valuations, the risk reward ratio is in your favour and you are making returns.
Last month, we saw a Larsen & Toubro giving you almost a 20% kind of a return despite all possible headwinds expected in the sector. Wherever valuations are reaching favourable troughs, there I think investors are willing to take a bet. The way we are approaching is that there are headwinds in every sector. But, if you feel that the valuations are reasonable then you need to go out and take a call. Q: If you had to give us a couple of stocks, I heard you mention midcap IT, what kind of names are you looking at, either from the midcap bunch or from the frontliners in the IT space?
A: We are recommending stocks like MindTree and Hexaware and NIIT Technologies in the midcap IT space. These are our top three recommendations in that sector and these are the stocks that we are recommending. Q: What about some of these spaces like sugar, which have seen quite a bit of traction, anything there that looks attractive now?
A: We do not have coverage on the sugar sector, so I wouldn't be able to give my views on that sector. Q: How much are you expecting from this much talked about policy action, what do you think it will boil down to in terms of hearing specific reform announcements now that the prime minister takes over the finance ministry portfolio?
A: I think there have been far too many false starts in the last two years, as far as policy announcements etc. are concerned. So I think markets are very careful and would like to see the announcements, hear the announcement before they take their call.
A lot of political compulsions are there and it is not like whatever announcements could have been made earlier are being made now. There are some challenges which the existing government partner will have to manage. But I think investors understand the ground realities and there could be some positive pop-ups based on expectations. But to sustain that will be a challenge.
We are looking more at the ground reality and trying to factor in that before investing in stocks just based on expectations. The investor risk appetite is not there for any adversity. It is better to be sure about the fundamentals and take a call instead of taking calls based on expectations about policy announcements.