Bet on rate-sensitives; roadmap key to oil biz view: Expert

Mahesh Patil of Birla Sun Life AMC analyses on CNBC-TV18 that rate-sensitive sectors constitute one of the key themes for the year as interest rates are to fall in the medium-to-long term and growth is set to recover on continued liquidity levels and positive corporate earnings. Patil adds that with the majority of the oil and gas sector dependent on government policy, a clear roadmap by the government is essential to take a view on the sector.

Highlighting the technical aspect of the day's market, Sudarshan Sukhani of s2analyticals.com adds that if the Nifty closes below 6,000, investors need to get out of all short-term trading positions. "The positional trades, taken when the Nifty broke from 5,920, have a stop loss is 5,900. These levels must be observed for the sake of disciplined." Below is the edited transcript of the Patil's analysis on CNBC-TV18 Q: It has been a great run the market has had up until now to the 20,000-level on the Sensex. How much more would you give it and what kind of positive triggers are you looking forward to right now?
A: It is difficult to predict the market in the near term but our outlook for this year expects the fundamentals to catch up and a mean reversion, not only in macro economic parameters but also in terms of earnings growth for this year. So while it is difficult to build a case for rerating when the economy is recovering and growth is only moderate, one would expect returns for the full year to be in line with the growth in corporate earnings which we expect to be 14-15 percent this calendar year. Q: Do you think the worst of earnings season is behind us or are we in store for nasty shocks from some of the more vulnerable sectors such as infrastructure and capital goods?
A: The start of the earnings season has been pretty good. The upgrades and downgrades cycle in earnings has bottomed out last quarter and remains neutral to a large extent. So I think the negative surprises are largely coming to an end as the economy has reached a new low and interest rates are already at peak levels.
So a lot of this has been factored to a large extent by analysts in terms of quarterly earnings forecasts and also for the next fiscal year. Though there could be company-specific issues, by and large we expect earnings this quarter will be the lowest in terms of y-o-y growth as compared to what has been seen for many quarters. But there might be some positive surprises in certain cases where analysts have been too pessimistic in terms of the growth outlook.
So there could be a possibility of some upgrades in next year's earnings going forward. Q: The RBI has indicated that inflation is still on a boil and the rate-cuts may take a little more time to be announced. What is your expectation particularly with respect to what will happens on January 29 and how would you approach a couple of segments like banks?
A: By and large, everyone expects a rate-cut in this policy. The quantum, whether it is 25 bps or 50 bps, is debatable. But from a market standpoint, instead of looking at the immediate policy it is more important to look at it from a slightly medium-term perspective in terms of where growth is headed and if inflation is really trending down.
So this data on inflation which is released on a fortnightly basis can be a bit misleading and volatile. We expect inflation in 2014 to be around 6.5 percent. And we don't expect any spike in commodities which can actually surprise on the higher side.
Given that, the outlook for this calendar year, a 75-bps kind of a rate cut is something which one should expect. So in the near term, the market has been expecting a sharp cut in rates as reflected by the rally in the rate-sensitive stocks. There could be some moderation in the rate-sensitive stocks in the shorter term. But in the longer term, the trend is very clear. We are positive on rate-sensitives including the banking and financial sectors. Q: In the interim between now and the Reserve Bank policy, what is the texture of the market? Do you anticipate a volatile run? Would you bet on any rate-sensitives now or keep away until you get more clarity?
A: From now and the monetary policy, the results season has begun in right earnest and we expect the market to actually react considerably to earnings. But we do not expect any secular momentum in the market and the movement is going to be range bound.
We expect that the considerable increase in liquidity due to global inflows seen in the beginning of the year, to continue. I think the volatility will be more stock-specific as the earnings season unfolds. From a structural perspective over the medium to long-term, interest rates will go down and the economy will recover. So, in the next few months one would still be constructive and any correction could be used to add in the rate-sensitive stocks. Q: If there is repeated profit-taking at intervals, what are the sectors or stocks you would advise accumulating?
A: The key themes for this year are rate sensitives and cyclicals which we believe will come back. Looking at the valuations, polarisation and the outperformance amongst defensive stocks in 2012, I think this is a trade which could play out this year. So any correction will be used to add in banking, financial, auto and selectively, in capital-goods. Q: Do you have any expectations from the oil and gas sector with Reliance Industries set to announce its results on Friday?
A: Apart from Reliance, a lot of the other PSUs in the oil and gas sector are dependent on government policy to a large extent and unless there is a clear roadmap, it is difficult take a view. We do not expect any major recovery in the global petrochemical, oil or gas cycle.