Mkt rally not to last long; don't plunge into midcaps: BNP

BNP Paribas Securities feels that the narrow market looks tempting to book profits. Manishi Raychaudhuri, managing director, Asian equity strategist, head of research – India feels that although the market has rallied, there is not much juice left. Improved current account and trade deficit may have been the reasons for the rally, he suggests. However, in the near-term, Korea is likely to emerge as an investment destination for FIIs, he tells CNBC-TV18. 

He advises investors not to plunge headlong into the midcaps, despite a relative divergence in valuation between them and large-caps. He also foresees poor earnings from PSU banks and Tier-II infrastructure companies, going forward.  Also read: Period of good results over; more mkt uptick unlikely: HSBC Below is the edited transcript of his interview to CNBC-TV18. Q: What is the sense you are getting about the markets? Which way is it going to head now? A: It has been slightly confusing. This rally seems to have disregarded quite a few international and domestic pressures. There have been few silver linings on the domestic economy side; particularly when it pertains to the current account and the trade deficit. It has decisively declined. If this run rate continues, we may even end up with a full year current account deficit of somewhere around USD 50 billion or even lower than that, which would be easily manageable by the external flows that India gets. Apart from that, there is very little to cheer about. As far as the economy is concerned, growth still remains tepid. There are some very insipient initial signs of some projects reviving, but for a sustainable recovery in the investment cycle, we have to wait for quite a few quarters. It is unlikely to happen in the next one or two quarters. Both the investment slow down and the consumption slow down may not see an end in the near-term. It is only the external sectors that seem to have done well, which has reflected partly in the stability of the rupee- even though that is largely due to dollar weakening across many other currencies. When you take all these things into account, the rally and the outperformance looks slightly confusing. We put out an Asia strategy note where India’s positions were trimmed down slightly more. It was more into North Asia and through an overweight position in Korea. That is likely to be the trend of investor positioning in the near-term at least. Q: Your sense is that there isn’t too much of juice left in this rally? A: I would think so. The extent of this rally and it is again being concentrated in the same old names. It gives a tempting signal to book some profits or take some money off the table. _PAGEBREAK_ Q: Some good quality numbers came in from the private banking space, the smaller ones that is – Federal Bank, ING Vysya Bank, Yes Bank. Would you pick up any of these stocks? A: The private sector banking space and in general the first half of the earning season has actually been quite decent. We have seen good numbers coming in from IT services as expected. We have seen good numbers coming in from the private sector banks and even some of the infrastructure and construction companies like Larsen and Turbo. However, the real bad apples haven't reported yet. We haven't seen public sector banks, second tier infrastructure and construction companies report their results yet. There is a huge degree of leverage or large debt equity ratios on the balance sheets. The results have been slightly better than expected till now, but I would still have to watch out for the commodities, public sector banks and second tier infrastructure and construction companies to make a complete judgment on the quality of numbers. Q: Any of the midcap stocks that looked good at this juncture? Or is this is not a buy time at all? A: It is better for investors to simply look at good stocks, which have growth opportunities and at the same time decent management quality. There are still such stocks that are available particularly in the IT services space, for example Persistent Systems. Even though the revenue has been lumpy, it has a clear edge in the new technology side; cloud computing etc. There are some of these small pockets that we have been highlighting both in the IT services side and possible also in the consumer side. Despite the relative valuation divergence between the midcaps and the large-caps, it is not yet the time to plunge headlong into the former category.