Sensex @ 21k likely; stick to defensives for now: Avendus

An investor should not reallocate funds to cyclical stocks over defensives just yet advises Girish Nadkarni, executive director, Avendus Capital.

Speaking to CNBC-TV18, Nadkarni says the earnings season, that has been relatively positive till now, is likely to disappoint in the days to come. Public Service Banks are most likely to cause pain, he adds.

Also read: Neutral on India; Fed to taper in Q1 CY14: Citi

However, on a more optimistic note, Nadkarni says the Sensex is likely to rally over 21000 in the short-term.

"The momentum in the market and the foreign institutional investors (FII) flows have been pushing it (the market) up. The macro economic indicators do not justify a significant rise in the market right now so probably in the short-term the momentum and the liquidity will carry it beyond the earlier highs that the market had seen close to 21,000 and carry it a little further," he adds.  

On sectors that seem hopeful, Nadkarni says metals will emerge as the dark horse aided by a fall in rupee and inflation.

Below is the edited transcript of Nadkarni’s interview to CNBC-TV18.

Q: Are you getting a sense that the market has run too hard and we could be seeing probably a period of consolidation now?

A: I think the momentum in the market and the foreign institutional investors (FII) flows have been pushing it up. The macro economic indicators do not justify a significant rise in the market right now so probably in the short-term the momentum and the liquidity will carry it beyond the earlier highs that the market had seen close to 21,000 and carry it a little further.

But by and large, market will consolidate at the upper end before making a new move upwards and that will largely depend upon the extent of growth that industry witnesses back based on reforms and action by the government.

Q: Broadly would you say that the early bird results that you saw gave an indication that things are a little better than what the street feared. Probably the darkest hour for earnings is over?

A: The early results have largely come in from IT and a few of the private sector banks where for IT, the outlook was positive. In private sector banks, the outlook was negative. The better banks have reported results. We still have to see a lot of the PSU banks numbers to come in and that will cause concerns in line with expectations. A lot of the industry, engineering, capital goods stocks barring Larsen and Turbo have yet to declare their results. The pain in the numbers is still to come I would guess. The better companies that have so far reported their numbers, have seen good Q2 earnings. The poorer numbers will now keep trickling in.

Q: Is this the time to churn your portfolio now and move out of defensives and enter cyclicals?

A: I don’t think so. I think there is nothing at the ground level to suggest that. The most important thing is that with inflation being high and with the base effect likely to kick in for the next six to nine months the wholesale price index (WPI) will continue to be high which will leave little room for Reserve bank of India action on the interest rate. So, while people are suggesting that the repo rate might be increased, one thing is certain that in the next six to nine months the expectations of a sharp fall in the interest rates is completely ruled out and therefore, that will mean that the earnings will continue to be under pressure for industry and the outlook will be muted.