Earnings season a headwind but technicals in favour: Pros

The near-term outlook for equities remains subdued as a combination of weak expected earnings and global macros may weigh on sentiment but the current price action suggests the recent pullback may have further legs, according to two analysts CNBC-TV18 spoke to."We believe that there isn't much of an upside to the market from here. Our target for Nifty is 8,200 for the calendar year end," Anant Shirgaonkar, Head - India Equities, UBS Securities, told CNBC-TV18."We are projecting about -4 percent earnings growth [for the second quarter]," he said. "In a scenario like that we have seen in the past that the market really struggles to go higher in a phase wherein the earnings are continuously downgraded."But even as the signs are that the ongoing pullback from 7,700 lows to about 8,200 are indicative of a counter-trend rally, there may be more to it technically, says Growth Avenues MD CK Narayan."The bottom that we formed in early September somewhere around 7,550, we followed that up with a higher bottom at 7,700," he said. "So from that perspective the market is creating the grounds for an advance here of at least an intermediate nature which could be something positive but we need to build on whatever we have done so far."The duo also discussed a number of stock and sector strategies.Below is the verbatim transcript of Anant Shirgaonkar and CK Narayan's interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: Do you get a sense that this good run that we have seen in the market will continue? Shirgaonkar: Our view has been a bit tepid on the market. We believe that there isn't much of an upside to the market from here. So, our target for Nifty is 8,200 for the year end i.e. December. We believe that there are headwinds ahead on the macro front but more importantly on the result season as it starts playing out. So, we are more cautious on the market, we think it is fairly valued here as compared to quite a few of the other participants. Anuj: When do you think the Indian market goes back to all time highs, do you think it happens in next calendar year or do we even have to wait for longer for that, do we have to wait longer for earnings to catch up then? Shirgaonkar: The big headwind for the Indian market is the results. As we saw in the previous quarter, the aggregate Nifty growth for earnings was -5 percent. So, we actually saw a contraction on earnings per share (EPS) for Nifty. We just came out with our projections for this coming quarter and that comes out to about flattish growth. So, we are projecting about -4 percent; still a small contraction or more or less flattish growth for Nifty. Now, the disconnect is that the street is projecting about 3 percent. So, that is fine, that is almost flattish. However, for the full year the street is still expecting 15 percent growth. If you take -5 percent growth, which we have seen in the first quarter followed by a flattish growth in this quarter, effectively the asking rate for the second half of the year goes up to 28 percent. Now, we think it is quite unlikely that the Nifty earnings could grow by 28 percent in the second half and therefore the most likely outcome is going to be the street expectations coming down from 15 percent to a more sober level. So, we are expecting 8 percent growth for the full year. I think that the street projections for Nifty would keep seeing earnings downgrades as we come lower from 15 percent to possibly closer to 8-10 percent where we really are. In a scenario like that we have seen in the past that the market really struggles to go higher in a phase wherein the earnings are continuously downgraded. So, our sense is over the next one or two quarters we will have to go through this phase of earnings downgrades and once we sort of come to a more normalised level of earnings projections, that is when we believe that the Nifty would have bottomed out and form a base enough to start the next move.  Sonia: You said you expect flattish growth in Nifty earnings this quarter but sector wise where are you the most cautious and on the flip side where do you see some amount of optimism this quarter?Shirgaonkar: I think the earnings for banking sector, particularly the ones which are focused on the retail side would be fine. The earnings for some of the consumption sectors would be fine. Pharmaceutical would be fine. The biggest draw on the earnings could be resources and metals and oil and gas wherein the commodity fall has actually taken a toll on the margins. So, that is going to drag the earnings quite a bit followed by maybe something which is a beta on that which is another resource. So, net-net the divergence this quarter is going to be pretty high across various sectors. IT is going to be fine on quarter-on-quarter (Q-o-Q) basis but it is not going to be much to report in terms of year-on-year (Y-o-Y) especially if you net off the rupee depreciation effect. So, net-net it will be quite an interesting earnings season because of the divergence across various sectors. However, on an aggregate level we won’t have much to report. So, in terms of growth it could turn out to be quite a disappointing quarter. Anuj: We have seen big gains in commodity names - oil and gas, metals and even cement. Do you think those gains will continue at least on the trading side or would you recommend booking profit if indeed you went long? Shirgaonkar: I think in the extreme shorter term, what would dictate the moves would possibly be what has preceded those moves. For example, in the commodity names, we have seen these stocks come off quite a bit in the last three or four months and given those oversold levels, the bounce was on the cards but we are actually projecting let us say a 12-18 month view. On that front I think we are selective again on commodities, we are positive on some of those steel names wherein most of the gains would come in from capacity additions and volume growth rather than pricing growth. So, we are not very positive in terms of commodity prices bouncing back aggressively over the next two years and therefore it is a better idea to stick to names wherein the tepid pricing could get offset by higher volume growth from those companies. So, that is really the way we are looking at the commodity space. Anuj: How important is the Bihar election for overall scheme of things? You think if the NDA gets a sweeping victory, do you think that could bring back the feel good factor considering everyone will then talk about the Rajya Sabha math and all that or do you think the market has already priced a bit of that already in? Shirgaonkar: We saw some of these media reported early projections and they are pretty mixed as well. However, our view on the Bihar elections is that whatever plays out, we are making a big ado about something which is not as significant for the economy as the market and commentators are making it out to be. So, we have looked at the math in Rajya Sabha and whatever be the Bihar elections, even if it is completely in favour of NDA the math starts turning favourable in Rajya Sabha by 2018. So, I don’t think it immediately changes anything in the parliament or at the center in terms of the upper house for the current government. It would be a sentiment positive, no doubt, and it probably would bring a spring in the shoes of the government and the center in terms of pursuing their policies more aggressively. So, no doubt on all of that but we are more circumspect that it would immediately impact the Rajya Sabha math. Sonia: Just one question on your sentiment on the market, you did start off by saying that you are cautious on the index but now we are seeing once again a resumption of global flows, there is risk appetite globally in fact a lot of the markets, not just the US and Europe, but now markets in Asia also are starting recover. Would that not make you a bit sanguine that we could be a part of a global improvement in risk appetite? Shirgaonkar: In terms of global flows, if you look at what has happened in the emerging market flows, say year-to-date (YTD), we have seen emerging market outflows which were crossing about USD 40 billion YTD which was way more than what we saw as outflows even in 2008. Now, last few weeks data that has come out, we are actually seeing that the outflows are sort of tapering off a bit. So, to that extent, the extent of outflows is definitely come off and that is really a positive. We do not believe the outflows will accelerate. So, I am completely with you on that in terms of outflows being more sedate or maybe we will start seeing some inflows come back to emerging markets as some money gets allocated. So, to that extent maybe the worst is behind us in terms of emerging market outflows. However, what we need to remember is that the macro for emerging market is still not in our favour and the macro for developed market still looks to be much better than emerging markets. So, to that extent when it comes to global positioning of funds, we are still projecting that we prefer developed markets over emerging markets and that is where the global flows also seems to be going. However, having said that, seasonally we are in for a good period for the global markets for both developed as well as emerging markets. So, to that extent we think that after this oversold move in emerging market, we could see a small bounce back. Seasonally things are in that favour. Within emerging market, within Asia Pacific, we believe that India and China both seem to be well poised to continue with their growth. So, we are not building in a crisis scenario in emerging markets or in Asia Ex-Japan. We continue to be overweight on India, overweight on China so that is the big picture that we are looking at in terms of emerging market flows as well as well the macro and where the market could move in the next three to four months or as we come closer to the year-end. Anuj: Are the bulls back in command or is this one of those countertrend rallies which would fizzle out? What is your bet right now?Narayan: As far as the data stands we will have to take it as a countertrend rally because we did dip down into 7,700 and we have now rallied about 500 points from that low which is pretty decent going. However, then it would have to be taken as countertrend rally because overall we still remain in a slightly declining environment. That said, if you peak beyond the immediate set of trends, I would probably think that towards the intermediate scale or even the longer term scale, the bottom that we formed in early September somewhere around 7,550, we followed that up with a higher bottom at 7,700.So from that perspective the market is creating the grounds for an advance here of at least an intermediate nature which could be something positive but we need to build on whatever we have done so far. This is just the first leg up; there will be some amount of backing and filling before we push out further throughout the rest of this year.Sonia: So, if you had to give us four or five stocks that the markets could bet on or trade on Monday either from the front liners or from the midcap what would your list look like?Narayan: Since earnings season is about to flow these picks would have to be on a slightly dynamic basis because the market will respond more to whatever are the number that will get declared. So, maybe hazarding a guess in advance might be slightly fought with a bit of a risk. So, I would first off suggest that viewers should be pretty nimble about what can be the prospects of stock in the week ahead.That said let us look at some of the leader stocks. Infosys comes to the mind straight off. That is usually the one which triggers off the whole of the earnings season. The way it has moved back again to somewhere near the Rs 1,160-1,180 zone that is clearly the breakout point for the stock to push through. So, my take would be that if the results numbers are able to produce an upside move in Infy past about Rs 1,175-1,180 levels on the futures that would qualify as a decent buy trigger and this can have a kind of rub off effect on the other IT stocks as well because they have been on an upswing but over the last week they have taken a bit of a breather and are probably waiting for some leader stocks to come out with their numbers. TCS would be the other one. The market doesn\\'t seem to be expecting too much from the leaders. So, there is room for the market to get surprised as far as the IT numbers are concerned.Next up would of course be the pharma pack which again has been leading the market from front and within this there was a decent pull back in Aurobindo Pharma which has got reversed into today and I would think that Aurobindo Pharma at the current price of about Rs 785 or thereabouts would actually present us with a good opportunity to continue higher. Typically Aurobindo results come in a little later. So, there would be enough room if the market were to pick up some amount of traction particularly in the pharma sector then Aurobindo would be one of the stocks that I would most definitely look at.So, from the pharma space Aurobindo, from the IT space, Infy. The two main picks that I would look at. The rest of them maybe a play based upon whatever results flow would come.Anuj: What about ICICI Bank and ITC? ICICI Bank moved up on Friday and ITC is showing signs of life after a really long time.Narayan: I agree with you there that ITC has actually started showing signs of life after quite a considerable amount of time. However, it has somehow kind of fallen off trader’s radar so it would require some news element to prod some interest back into ITC. So, the initial signs are there that the buyers are back in ITC, so, I would probably have some initiating longs in this, play it long basically and have some initial long positions and if some positive news flow were to emerge across the week, then I would really load up the truck with ITC from a trading perspective.As far as ICICI Bank is concerned, I would still remain quite skeptical because the banks as a whole have not really performed subsequent to the rate cut which has been a bit disappointment for most of the market because everybody was expecting this sector to surge. In particular, ICICI Bank has been a big laggard as far as the private sector banks are concerned.IndusInd Bank came out with results, did not do very much for the sector, did not do very much for the stock itself so again here I would think that the banking sector as a whole would also need a nice shot in the arm by way of a few very positive number flows from some of the leader numbers and then ICICI can probably meet with some let us say some interested buying and probably take up with this initial hint of a recovery.