See downside to Q2 results; invest in cyclicals: Blackridge

Analysts are not very uptick on the market going forward. Arindam Ghosh of Blackridge Capital cautions of extremely volatile and choppiness going ahead. According to him, earnings for next quarter are also going to be a huge trigger for the market on the downside. In an interview to CNBC-TV18, he said that the corporates will take time to repair their balance sheets and deliver.

Meanwhile, he advises investing in cyclicals from a 18 months to two-year investment perspective. He sees banking stocks leading the market for now on the back of the Reserve Bank’s policy measures. Commenting on RBI’s policy meet on September 20, he said that the steps that have been announced are practical, but its effect will only be seen in the long-run. He further added that India may not be the preferred investment destination till the elections are over.  Also read: Cannot let guard on rupee, inflation slip: C Rangarajan Below is the edited transcript of his interview to CNBC-TV18. Q: What would the approach be to the markets? Has the uptrend in September gotten arrested post the Reserve Bank of India (RBI) policy? Or are there still some more to go on the upside? A: It is a difficult call from a market perspective. We are in a situation where clearly the upside from hereon is pretty much restricted. Having said that, what we have heard from the central bank is indeed a very balanced and pragmatic policy with a clear focus on how to fix some of the long-term structural issues; to achieve greater stability. The government, couple of days back, announced that its top priority is now going to be fiscal consolidation. We heard the central bank saying that we are now entered a higher interest rate regime. Over the long-term, ultimately this will result in higher public savings. We will have the Current Account Deficit (CAD) and inflation coming down. Of course, as long as all of these get well supported by the currency which has already devaluated quite a bit. From an India perspective, there are these domestic factors which would continue to challenge the Indian economy. The global environment has turned a lot more benign. Despite the deferment of Fed's tapering, it could well be that the allocation to the region would largely be skewed in favour of the large export-led economies and India probably would continue to remain out of favour till we get to see a lot of these reform measures. The effect of that is starting to play out and we have some of the local events like the state election and the central election getting out of our way. Till then, obviously the markets are going to remain extremely volatile, choppy with very limited upside from here. Q: What is your call on banking, which is quite a bit of comeback this week? Friday was a bit disappointing, but there was quite a bit of buying in some of these names. Is it just a bear market rally or can you spot something constructive about banks? A: Banking has been clearly out of favour. We have seen a tremendous amount of erosion in value in both the private sector and PSU banks on account Non-Performing Loans (NPL); in a situation where we are in an environment of slower credit off take. The Net Interest Margins (NIM) are under pressure. There are capitalisation issues. _PAGEBREAK_ The balance sheets of these banks have not got healed. The move that we saw yesterday was largely on account of a relief rally and with the hope that with the liquidity continued to remain unabated and probably we would now see the banks actually starting to lead the market. Having said that, we all know whilst the tapering has indeed been postponed, we may not be able to kind of derive maximum benefit out of the allocation which is going to come to the region. Stock markets would continue to remain challenged. We would definitely see money moving out, whatever we had seen coming in and out of the banking stocks and probably getting into those usual suspects of some of the typical IT, healthcare, consumer staples and kind of names. Q: The next trigger for the markets is clearly the Q2 earnings. There is so much despondency on that. Many people believe that this could be on of the worst quarters that our markets will see. How are you getting into the earnings season this time? How much do you think it has the potential to drag the markets lower? A: Whilst price could have actually troughed out in quite a few stocks across, but the same cannot obviously be said of earnings. We have actually seen the cost of capital going up significantly. The working capital cycle is getting extended and the number of earnings downgrade is probably more than the past. So, the expectation is absolutely tepid. Over the next couple of quarters, corporates are probably going to take time. Repairing and delivering the balance sheet is going to take quite a while. Earnings are going to be one big trigger on the downside. We will be closely watching that. The preference has to be on quality, companies which will be able to grow exponentially once interest rate and the credit cycle start to turn. There is definitely value in a lot of counters and bottom-fishing needs to be done to to take them out. Our focus would not do a real sectoral approach. In an environment that we are in, it will be hovering around some of the large front-line Fast Moving Consumer Goods (FMCG) names, IT companies which we have seen in the past and that is where we have seen the herding happening of the trades. Clearly, the valuations have run up significantly. From a long-term point of view, the difficult call would be to try and see whether one needs to get into the defensives or the cyclicals. If you have the longer term approach, conviction in the economy and inflation measures starting to get anchored, go for longer term cyclicals over a 18 month to two year investment horizon. Q: Will the bipolar nature of the market, which is a big outperformance from export oriented sectors and big underperformance of cyclicals; and some of the domestic sectors going to correct over the next maybe one or two years? A: As slowly the fundamentals improve, this divergence will start to close. It would be hard to put a timeframe to it. We have already seen some kind of definite improvement on the margin, but there are definitely some events which is going to play out over 18-24 months. Cyclicals will have the potential to stage a comeback. There are fundamentally solid companies which deserve much more attention than today. They are obviously available at an extremely attractive valuation. Both qualitative and quantitative filtering would typically pick up a good list of at least 20-25 stocks which hold a lot of promise, given where we are today and given where we expect to be a couple of years from here.