Mkt on a contracting trade range; earnings in line: Experts

Ahead of October expiry, choppy trade marked the day at the market. While the Nifty closed at 5,691.40, the Sensex ended the day at 18710.02.

Sudarshan Sukhani of s2analytics.com believes there is absolutely nothing coming out of the present trading action and the range is contracting. However, he points out that it is nothing unusual. "We have seen similar patterns many times in the past, this is not the first time and it’s not the last. The Nifty will make a decision on which way it wants to go and most of the stocks will follow the Nifty. It’s more a game of patience. If we have the patience we will get the rewards," added Sukhani.
Lakshmikant Reddy, EVP & Head of Equity, ICICI Prudential Life believes the earnings season has more or less met expectations so far. The market has seen several sharp upmoves, but for it to sustain there has to be improvement in the ground. He feels for the market to break out of this range, it is essential for corporate earnings to pick up. Here is the edited transcript of the interview on CNBC-TV18. Q: What have you made of the earnings season so far and any sense that you get that perhaps there will be a tweaking in the Sensex EPS or the Nifty EPS expectations?
A: Thus far whatever results we have seen, I would say the numbers have broadly been in line with expectations. Given the several macro headwinds, we were expecting somewhat of a low double digit top-line growth with a high single digit bottom-line growth. If one looks at the results that have come out thus far, a few capital good companies, some IT services companies and certain banks, the numbers I would say have been more or less in line with the weak expectations one had from the reporting season.
Coming to your second question, this would lift expectations for this year as well as next year. I do not think there will be any material impact on this year’s aggregate corporate profits. What would happen to the next year is the most important question that one is trying to grapple with.
We have seen the market moving up on expectations that the cycle has bottomed out and FY14 would see improvement in both economic growth as well as corporate earnings growth and as things stand today, it remains an expectation. I do not think we would find any support for that in the ongoing results season. Q: What about the markets, do you see any trigger that would take the markets above this range that it has been dealing with for a while or do you think that we are going to gravitate within this range for a bit?
A: We have some view on that and we have a portfolio positioned for that. If you look at last two years, a little more than 2 years we have had many 8-10 percent rallies, sometimes on domestic developments and very often on global developments. We are at this 8-10 percent rally but they have not subsequently sustained and the market is slowly giving way.
This time also we have been in a fairly sharp upmove and our view is that eventually for the sharp upmove to sustain, things on the ground have to improve. Namely, if you look at the last two years, the GDP growth forecast have come down from 8 percent plus for FY13 to may be a 6 percent range or a sub 6 percent range in some cases. Today the expectation is that next year would see some sort of an improvement and it is pretty much possible because perhaps the interest rate cycle should turn.
Due to that there are reasonable grounds to believe that FY14 may be better than FY13. Much remains to be seen as to how much better that would be. For the market to really breakout of this range that we have been in for nearly 2 years, it is important for corporate earnings to pick up from its present 8 percent to 9 percent gains that we have seen in the last 2-3 quarters. For that to pick up we need to see some of the companies in the core sectors doing very well.
Thus far if you see the dispersion of earnings, there have been a few sectors that are doing very well and most sectors that are not doing that well because of which we have been trapped in these single digit earnings momentum in aggregate, we need to see the core sectors particularly the investment cycle picking up. As things stand today the odds are that we would see a slightly better next year. But, how much better, we need to wait and watch. Q: How do you position your portfolio in such times now?
A: Even on a very good day we do not generally go by sectors per se, because it is not as if we would have a positive opinion on each and every company in any sector. We have for instance some names in the private sector banks which we have been bullish throughout the ups and downs, perhaps some of those names which have a more corporate lending kind of book.
One wants to maybe have a little more weightage on it because as I said, the expectation is that maybe next year will be better than this year as things stand today. We would have some positions in the core sector, be it in infra, utilities, energy or some of these names which we own in our portfolios.
Similarly, the auto cycle has seen a significant slowdown in the last 12 months and the odds are that next year we would again see some sort of revival, at least in some of those names. Hence, one could actually be invested in them. These are three-four areas in which one could see growth. Having said that, the cyclical component of the portfolio tends to be 40 percent or so.
A large part of the portfolio tends to be what we would believe the core long-term portfolio that we would want to own somewhat passively. It remains and is not really a function of whether you really believe the cycle would turn this year or next year. Q: Is there any midcap sector or arena where you think there could be an improvement in earnings and thereby a follow-through on the stock side as well?
A: Yes, for example while the general consumer sector has done very well in the last three years, one of the sectors that one would naturally expect to benefit when there is so much of consumption spending would be media for instance. However, in general, barring one odd company advertising growth has slowed down quite a bit in the last two years, more so in the case of print media. Our view is that perhaps it is time for a reversal in some of these trends in those sectors.