Key risks remain; stay stock-specific: StanChart Sec

Dhiraj Agarwal of Standard Chartered Securities highlights, on CNBC-TV18, that there are some major risk-factors in the economy that continue to be ignored by investors such as the reduction in demand in post Diwali and the collapse in banks' deposit growth. Agarwal advises investors to adopt a bottom-up approach and focus on stocks that are performing well despite a range-bound market.

Below is an edited transcript of Dhiraj Agarwal's analysis on CNBC-TV18 Q: What did you make of how the markets reacted to the rate-cut on Tuesday?
A: The rate-cut has been broadly expected, so it is not that it came as a big surprise. The market has been running for the last few months largely on government policy announcements and expectations of a rate cut. It is typical for profit-taking to occur on news of this kind. I do not find the market reaction to be out of the ordinary. Q: The market remains sticky. What do you expect to see from the market in the run-up to the Budget?
A: I think the market will be in a range as most of the positive policy news has already been broadly discounted, known and understood. It should be noted that the Nifty was less than under-5,000 barely six months ago and has risen to above-6,000 today.
The reason for this spectacular rally has been that the government has over-delivered as compared to expectation, but at the same time market needs new triggers now. Most of the policy announcements are now in line and have been broadly discounted. Q: So within this trading range, where do you see the downside being capped for the moment?
A: At the margins, I think the risk of a correction is higher than the risk of continued upside performance because of the widespread focus on the positives and ignorance of the negatives. To start with, little attention is being paid to the fact that demand has slowed down a lot after Diwali across segments despite the positive sentiment ushered in by government initiative.
So, that is a huge risk. This is followed by the complete collapse of banks' growth in deposits and may actually hinder the public from receiving the full benefit of the rate-cuts. No thought is being given to these risks at this point of time and that is the biggest risk. Q: A lot of erstwhile market leaders have tripped up this quarter either on the back of news or earnings. How are you churning your sector or stock allocation?
A: While a lot of discussion in the financial market centers around the Index and Index-forecasts, the reality is that in the last three years Indian market has been very bottom-up with possible exception of small windows of four-to-six months where thematic moves have actually played out.
And that is what I continue to advise at this point of time. Be bottom-up focused and be very stock-focused. Investors should not be so index-obsessed at this point of time because in these kind of range-bound markets there are stocks which continue to deliver positive performance and vice-versa. So there is no clear sectoral thematic advice at the moment, but largely that investors need to be bottom-up focused. Q: How do you approach a space like consumer-goods that has traditionally been a big performer or even some of the newer midcap entities that have begun to move?
A: No, it is very mixed. One should remember that while there is some slowdown in a few consumer-good companies, the stock prices have also corrected. So once that is taken into account, the investment thesis at the current prices does not look very bad either. But with respect to consumer-goods there is a bit of a mixed feeling in the market at this point of time. I would still consider them as great long-term plays. Q: What do you make of the earnings season so far this quarter? Are confident that earnings have actually troughed out?
A: That is a huge bet. I do not think the troughing-out is round the corner. But there could be earnings upgrades in the second-half. I think a lot will depend on what happens after the Budget.
Another big risk in the wings is the state elections in June, November and general elections in 2014. There is a little bit of confusion surrounding this and I frankly think this is going to be one of the most unpredictable elections for India for a variety of reasons. If that results in a little bit of uncertainty, the earnings uptick might not happen and that is another risk. But this needs to be observed. Q: On Tuesday, Axis Bank successfully closed out a large qualified institutional placement (QIP) issue. Do you see FII  (FII) flows holding out as well as they have for the last couple of months?
A: Inflows were strong even in 2012 at USD 25 billion. In 2013, including Tuesday’s primary fundraising, the flows in January already total upto over-USD 4 billion. But it is important to note that despite strong inflows in January, the Nifty is up only 1.5 percent. That indicates the absorption capacity for funds by the market at these levels. Q: What remains to be the downside risk for the market? Is it going to be a sharp 10-percent cut or something much lower?
A: Given what the current red hot mood the market is in, a 10-percent correction is going to feel like a bear market shock. At this point of time to say that there could be a correction risk of more than 10 percent seems a bit extreme. The investor-mood is so sensitive that a 2-percent slip in the Nifty creates a mini-panic in sentiment. Q: How do you approach the capital goods segment? Do you have high conviction in chasing cyclicals in the infrastructure space?
A: I think with country going into one of the most unpredictable general elections and with a host of state elections slated during the year, large corporates wanting to invest huge sums of money might probably think twice about committing large sums of money.
So, I am personally not very optimistic about a capex cycle revival. There will be pockets of infrastructure-project clearances, but a large-scale and meaningful revival is a still far away.