Market rally has no meaning; narrowness a worry: Experts

The market witnessed a bull run on Thursday with the Sensex almost touching its all-time high. The Nifty too breached the 6300 mark before closing at 6299.55. However, experts are not very upbeat about the same given the narrowness on the performing stocks and valuations.

“We are in a dichotomous situation where the good stocks, which everyone wants to focus on, are expensive and the relatively fundamentally unattractive stocks are cheap”, says BNP Paribas Securities’ Manishi Raychaudhuri. Sanjay Dutt of Quantum Securities also sees nothing significant on the realistic valuations. “The rise has been extremely narrow and even in terms of market participation, it is not there whatsoever”, he tells CNBC-TV18. Also read: Sell FMCG, buy steel; see next upmove in cyclicals: Mowat Below is the edited transcript of their interview to CNBC-TV18. Q: What do you make of the likeliness of reaching an all-time high on the Sensex? Raychaudhuri: On an absolute basis, it does not mean much. If you compare to the 10 point then the Sensex was at the same level. The earnings base has gone up somewhere around 35-40 percent. The valuations are actually totally different. This scaling a new high etc. maybe important news flow, but on a substantive basis it does not really mean much. The other thing is that when you compare the market, the Sensex was at the same level about three years. There were certain stocks that were at totally different levels. If you have compared the metal stocks they are far higher. They were more than double at the current level. It is a totally different set of stocks that are taking the market here. It is a very narrow restricted range of stocks. Q: How fragile is this near all-time high that we have reached on both the Sensex and the Nifty is not far behind either? Raychaudhuri: The market maybe somewhere close to about 14.5-15 times right now, which is pretty close to its long-term average, but that long-term average and the market valuation itself means very little. The divergence between sectors is so high today that you have one set of stocks that are investors' darling like pharmaceuticals, consumers, IT services trading at sky high valuation and on the other hand you have the commodities, public sector banks or the second-tier engineering companies that are trading at extremely lower valuations. Still nobody wants to touch them, particularly the institutional investors. So we are in a dichotomous situation where the good stocks which everyone wants to focus on are expensive and the relatively fundamentally unattractive stocks are cheap. We are not really able to get out of that situation and we won't be until and unless the basic macroeconomic factors improve and the earnings growth become broad-based. Q: You are an inherent bull. Would you be happy with the all-time high? Dutt: I do not think there is anything that shows on the street that there is happiness at this moment. As correctly pointed out by Manishi that this is an absolute number and absolute levels so whether one can rejoice about it, but if you look at on a realistic valuation basis, there is no meaning whatsoever. The rise has been extremely narrow and even in terms of market participation the participation is not there whatsoever. If you were to go on a market cap-to-GDP basis it would be still lower than the earlier highs. Frankly I would say it is a random voice. Even a new high does not mean much. Q: On a valuation basis aren't we in a better place today than we were a few years ago and therefore do you see this as a sustainable rise in the markets? Dutt: The sustainable issue has got to do with wider participation. We have got to understand that till we do not have a lot of macro issues, a lot of structural issues sorted out in the real economy. Just the swap prices and valuations do not have any meaning whatsoever and we are still plagued with a lot of problems related to company balance sheets, issues got to do with cost of funding.