Earnings key; rally may continue for more than 2 weeks: Pros

Whether the market is in a bull or bear phase will not matter to an investor with a one-year time frame, says Sridhar Sivaram, investment director at Enam Holdings. Going forward, however, continuation of the current market rally will depend of earnings growth and right now the feelers are not that great, he told CNBC-TV18.

While a lot of factors were responsible for the market selloff — ranging from global to drought — earnings support will be required in the long run, he adds.

Sivaram says if money comes into emerging markets, India too will benefit. "Nobody comes to India to hide, they come here to grow and that will only happen if earnings growth makes a comeback," he adds.

Meanwhile, Ashwani Gujral of ashwanigujral.com feels that perhaps a medium-term bottom is in place, and going forward the rally may extend for more than two weeks.Below is the verbatim transcript of Sridhar Sivaram and Ashwani Gujral's interview..Anuj: Was this a bear market rally or have we put a bottom in place and from hereon should the markets move up?Sivaram: Whether we are in a bear market or a bull market, these terminologies keep moving up and down. However the fact is that we are still down almost say 15-18 percent if we take a one year timeframe. If I look at the earnings growth trajectory even that has disappointed almost for two years now and we are not expecting the earnings growth to be anything great. So, what has happened is that the market was  heavily oversold and we got a Budget which was I would say at the margin was a quite a surprise. The numbers looked reasonably good. So, we did see a pullback rally and globally also within emerging markets we have seen markets rallying. So, I think it is a combination of lot of factors. So, whether the markets can continue to rally from here, that will depend on the earnings growth which we will see may be in a month's time when we start getting earnings. As of now the feelers we get is it is not going to be that great. So, that is where the markets are right now.Sonia: You did mention that the feelers are not that great for earnings. So, do you get a sense that perhaps at some point through the course of the year we could revisit our February lows as well?Sivaram: It is very difficult to talk about whether we touch the February lows or not. Lot of it is also global factors but for the markets to have a sustained rally from here it is reasonably sure that you need earnings support which we have not been getting at all.Whenever we speak to corporate right now, the general feel we get is that they are waiting for the consumption growth to pickup and they expect that to happen say in another six months time. So, every time you speak, people are optimistic that this will fall into place at some point of time but for whatever reason global, domestic, drought last year, combination of factors that has really not played out.In my view when we get consumption growth back in our economy that will have a significant impact on the earnings growth of companies.Anuj: You have seen many market cycles, what have you made of the big inflows that we have seen from FIIs last week. Before that it was consistent outflows, all of a sudden that has turned and it has turned for global emerging markets, India has not been specific in that. What do you make of that, is this a tactical play, ETF money driving the prices higher or could we have seen some long only funds entering markets after the kind of levels that we had seen in February?Sivaram: If you see the market performances of emerging markets say over the last one month or so, India though has moved up has significantly underperformed. Markets like the so called fragile 5 barring India all are in positive territory with markets like Brazil up 20 percent, Indonesia up 11-12 percent. So, India was a defensive market, people were hiding there but if we see risk appetite come back it is highly possible that this underperformance of India within emerging markets may continue. However if money is coming into emerging markets all markets will benefit and so will India which is what we are seeing right now.However for India the most important thing would be that we get our earnings growth back. People invest in India for growth, people come to India because there is strong earnings growth not to hide. So, when we get earnings growth the whole complexion of the market changes which is what we have seen between  2003 and 2007 irrespective of what happens to commodity prices our markets were doing well.Sonia: To that effect have you seen any recovery anywhere because some of these consumption plays, Marico for example is sitting at a new 52-week high, Maruti has seen a recovery from its lows, where are you seeing concrete signs of a recovery in earnings?Sivaram: There are green shoots in different places. However we are not seeing a follow-up of green shoots to becoming a proper growth.So, we are seeing green shoots in commercial vehicle (CV) cycle. We did see passenger vehicles having strong growth, first half of last year but last two months we have seen it has not been picking up. So, there has been a combination of factors. However in my mind what we are seeing right now is very early signs of green shoots. However we are really not seeing a follow through of that.According to me if the government had focused more on consumption in the Budget, in fact they should have focused on that even in the previous Budget, that would have had a significant impact. In fact one of the points I have often made is that they should have passed on at least 70 percent of the benefit of the crude fall whereas the government has taken 70 percent and the GDP multiplier of the corporate and the consumer at large is far higher than the  government. As a result we would have got growth and one of the economists has pointed out that had the government passed on the benefit our inflation would have been at least 100 basis points lower which would have forced the RBI to cut rates. So, we would have got a fiscal and a monetary stimulus. This is hindsight but the point is that the government is more focused on the fiscal deficit right now, not saying it is wrong but there are other ways of meeting the fiscal deficit. Asset sales is one of the ways they could have done last year when the markets were so high.So, in a sluggish economy it is better to do asset sale rate rather than increase taxes. You can do the reverse in a good economy because the markets can or the economy can absorb a higher tax.Anuj: Last year was all about portfolio selection, the market did not do anything but a lot of stocks did well. That changed over the course of January and February. Are you sensing that, that is coming back because we have seen so many stocks go back to their lifetime highs, Infosys is a case in point, almost there. Asian Paints is getting there, Marico, do you get a feeling that even in this market if you get your individual stock selection right you will still make a lot of money? Sivaram: This is has become a stock selection market now. If you go back to 2014, it was about sector selection. You be in the right sector it did not matter which stock you have selected. Now it is becoming more and more difficult. Even within sectors you have absolute winners and you have absolute losers. So, it has really become a bottom-up stock pickers market right now. The work that you need to do to pick stocks is much harder right now because there are so many factors that can impact a stock performance.So, this is a tough market, making money is difficult which is what I had earlier said that it is better to preserve capital. In markets like this you will get sharp moves. People who are experts who understand the markets it is easier for them rather than for a retail investor who may get tempted seeing the market fall and get in and then lose his money later on.Sonia: So, you are saying that at this point retail investors should not venture out, they should just wait for a bit?Sivaram: The best way for them is a mutual fund. There as well you haven’t made money in last few years but that is the hope that you will win if the markets recover. So, it comes back to my earlier point that we are not getting earnings growth. If we don't get earnings growth the markets cannot move up. So, it is a full cycle. I am not expecting that to happen in the next two quarters at least. Hopefully if we get good rainfall and then the quarter after that may look promising.Anuj: This month rather has been about a lot of high beta names, metals clearly have been the biggest outperformers, they have rallied 20-25 percent this month. Do you think this kind of run can continue if we have a bit more of easy liquidity scenario and also a bit more of  risk on play globally, do you think this run can extend?Sivaram: Metals have been extremely oversold sector globally also. Has anything changed fundamentally for them? I don't think so. China is still a country which people are watching very closely and they impact commodity prices more than any other country.I don't think things there have changed that drastically. There is still a fear that they may devalue the Yuan at some point of time. We don't know if they will or they will not. However there is a high probability of that.I think commodities as a trade if somebody can pick the bottom and sell with the rally, it is great but it is not a fundamental investment idea right now.The fundamentals of the sector are not looking that great. Having said that it was oversold, there were lot of short positions, so we have seen very sharp reactions in that sector.Anuj: What should one make of a week like the one we had. Positive considering that we had 6.5 percent gains last week. Or would you say that there was some sign of fatigue towards the end?Gujral: The point is that we have just into this pullback for the last couple of weeks. So, in terms of time it is way too soon to say that this is the top. Given that there are enough indications that maybe a medium term bottom has been made you will have a rally which will extend much beyond two weeks. This week the important bet was that we should have created some sort of higher support. That higher support has been created at 7400. I won't have been happy even if it was at 7250-7300 but 7400 just means that market is much more stronger than most people expect. This sort of narrow range week just absorbs all the gains, allows people to book profits, allows new people to come in. So, the idea should be that maybe next week or sometime later this trend should continue because after a huge bar when you get a small bar like the one we had this week that often means that there is a continuation that is likely to happen.Sonia: Last week on Taking Stock you gave us Cairn India as one of the big trades to watch this week and that one has played out beautifully. It is up about 15 odd percent. Is there still more steam to go on Cairn and any other stocks that you would recommend for the next week?Gujral: Cairn India basically this month's action which is about 10-11 days has taken out three months worth of bars if you look at it historically and the 200 day moving average (DMA) is still around Rs 190-200. So, there is still upside left. I told you that once momentum reverses 200 DMAs and who get tested. So, chances are Cairn India will do much better in the days to come and people who got in early should hold on. Maybe Rs 170-175 should be possible in the next couple of weeks.As far as other stocks are concerned Tata Motors again something which has been bashed up a lot and now the momentum is reversing here. So, this one you could have a medium term target of Rs 420.Similarly, Adani Ports, very fancy stock earlier but got into hard times. Again momentum is beginning to reverse here. We could probably look at targets of Rs 280 in the medium term and Bharat Forge from Rs 1,400 relentless fall to Rs 800m, extremely over sold. Again Rs 990-1,000 is easily possible in the next one or two months.Anuj: What about some of the other big movers of the month, let us say something like a Tata Steel or Hindalco or Vedanta where you saw some profit booking this week but for the month they are still up about 18-20 percent?Gujral: Very similar charts on Tata Steel, Hindalco or Vedanta where they have come down for several months. Tata Steel hit a long term support at Rs 190 and from there this month it has shown good amount of momentum. I wouldn’t be surprised if Tata Steel gets up to Rs 325-330 in this pullback itself. It will only be a pullback. Similarly Hindalco,  I wouldn’t be surprised if you see probably Rs 115-120 on Hindalco. Similar levels on Vedanta because chances are that large commodity rally is going to play out. If the market has to move on to 7700 commodities would play a huge role in that move.Sonia: You spoke about Bharat Forge as one of your picks in the midcap space but I wanted to ask you about some other midcaps that have had great trends this month. One of them is Marico which is sitting at a fresh 52-week high at about Rs 250. The other one is Torrent Power, similar case for that one, that one too is at a fresh 52-week high and Finolex Industries. Generally up trending stocks tend to gain more strength, would you trade any of them on the long side?Gujral: Things which are at new highs are good for the short term. The stocks that I told you about are good risk reward. They are medium term calls which are great value stocks.Marico easily we should see Rs 265-270. Torrent Power never really corrected in the correction and now possibly Rs 275-280. Finolex had something in the Budget which was positive for it. So, chances are that you could see more upside here particularly stocks related to irrigation. I think Finolex has come out of consolidation above Rs 340 and may be another Rs 100, Rs 430-440 is possible. Clearly since the Budget it has gained probably 25 percent. Once stocks make this kind of a move generally there is a continuation which happens.Anuj: The other trade where you got in a bit early was the midcap pharma. Again may be you could put it in same category as couple of metal names, they all had big declines and this month we have seen big gains in the likes of Strides Shasun, Wockhardt, Aurobindo Pharma, even Ajanta Pharma, anything that looks good for more from hereon as well?Gujral: There is a difference, the difference is all of these midcap pharma stocks they went up for two years, they went up 10-12 times. Then they just corrected back towards the 20 month moving average which was a correction and now they have resumed their upside. Whereas Tata Steel, Vedanta, they crashed and they crashed much below the 20 month moving averages, there it is a mean reversion trade.So, if somebody wants to trade trend he should still go for midcap pharma where new highs can be expected. However Tata Steel, Vedanta etc what you are getting is rally from oversold levels.What happens is that generally the trend trades tend to continue whereas things which are coming off oversold levels beyond a point they are unable to make fresh highs etc and they find resistance at these key moving averages.