Mkt can test 6200-6300, new bull mkt unlikely: StanChart

In an interview to CNBC-TV18, Dhiraj Agarwal, Director - Institutional Equities of Standard Chartered Securities gives his expectations from the market. Agarwal says he is bullish on the market performance and says the market will test 6200-6300 in the next few months. Agarwal says 6350 could be the target to be tested next year.

Also read: FII flows to continue; cautious on sectors: Credit Suisse

Below is the edited transcript of Agarwal's interview.  Q: How bullish are you hereon?
A: I am still positive that there is a good probability the market can test 6,200-6,300 in the next few months. So in percentage terms, at the index level, one can say not more than 8-10 percent. Q: That is pretty bullish since it would constitute a new high. Do you think that is on target for next year?
A: I doubt it. I think we will go and test the 6,350 high. I do not think we will break into a new high in a conclusive fashion. By that I mean, a break of one or 1.5 percent above that high is possible, but I am not betting on a new bull market here. However, I think this rally has some more way to go. Q: Where do you put the base for this market now? Do you agree that the market may have bottomed out and we have got a base, which is significantly higher than what we were talking about at the start of the year?
A: I think next year will throw up a lot of challenges. It is too early to figure out what the base for the next year is going to be. In the very short-term perhaps 5,500 or 5,600 is the base. The possible target works out to 6,200 and 6,300. However, I think we forget at this point of time that while a lot of initiatives have been announced by the government, implementation is still going to be a challenge given the fragmented political scenario at this point of time. At some point of time next year, the country goes into an election mode. Whether the election happens in second half of next year or 2014 is just a matter of a little bit fine-tuning but 2014 is certainly election time.

At this point of time, if you do any bit of political math to be able to forecast a strong government coming back to power, it is going to be challenging. So if you are talking about short-term, I would say 5,500-5,600 is the best possible target of 6,200-6,300. If you are talking about long-term, I think it can be challenging.
_PAGEBREAK_ Q: There are a lot of stocks that have done much better than what the Nifty has. Do you think that could be the continuing trend in the next few months that the index sees decent returns, but it is some of these new blue-chips that extrapolate their returns?
A: Yes, I think so. This market is very similar to what we saw in 90s. There are a lot of parallels to be drawn at the macroeconomic level, at the political level, at the bipolar nature of the economy as well as the bipolar nature of the stock markets.

If we go back to 90s and see the then current environment, it is identical. Growth was slowing down, inflation was stubborn, interest rates were stubborn, earnings growth for the market as a whole was slow. However, one segment of the market continued to do well, both in terms of earnings growth as well as stock performance, and that is an identical scenario.
Even in terms of index performance, if you go back to 90s and see every 12 or 15 months, the Sensex, which was the widely quoted index at that point of time used to reach almost to the highs of roughly 5,400-5,500. All of us used to believe a new bull market is starting. Within 12-15 months after that, it would drop below 3,000 once again. So that was the range- 3,000 to 4,500 and it happened four-five times over seven-eight years. I think the companies which are performing well, irrespective of slightly higher valuations will continue to deliver super returns. Q: You see a big range next year for 2013 as the market gets pass the budget and starts focusing on election talk and rhetoric? You think we could be in for a very wide ranging here?
A: I think so. I think the current trend is up. Market is still digesting the positive surprises that the government is able to deliver something after taking a very pessimistic view on policy framework. In policy making there could be one or two rate cuts going into next year. Also remember on the rate cut side that there is not much legroom the Reserve Bank of India (RBI) has, because despite global slowdown, domestic slowdown, inflation is still stubborn at 7-7.5 percent range.
So there could be couple of rate cuts, but do not expect 2003-2004 kind of a scenario where there were like six to eight rate cuts one after the other. Yes, the current trend is up while market digests the positivity coming out of the government and expectations of rate cuts but second half can be have a very wide range, and can be very volatile and very tough. Q: How would you position your portfolio and approach investing in a market which you are suggesting will be a very wide range and volatile kind of year in 2013?
A: We will just continue to do what we did in 2011 and 2012, which is focused on quality companies with good earnings growth. That segment of the market should do well. From a shorter-term point of view, there is obviously a clear beta trade building. One can trade that if one wants, which is obviously fast, quick and risky, but from a longer-term point of view, just sticking with quality and predictable earnings growth will pay off again. Q: Your central risk for next year is politics. You are not that worried about what may happen either in terms of monetary policy or global developments?
A: As far as the global developments are concerned, my view is that unless there is a complete crisis, the markets are broadly decoupling from each other. If you see at this year itself or even last year while we tend to focus a lot upon what is happening in the global markets as well as global developments, the fact is different markets are going in sort of different directions. China is still making new lows, India is very close to new highs. Surprisingly, I noticed that Karachi’s stock exchange is significantly above 2008. Many emerging markets have gone in sort of opposite directions while US and Europe have done their own thing.
So at this point of time, it does appear that a complete crisis scenario is not around the corner. I would watch the global cues but primarily keep it aside. I think the markets would be driven by domestic fundamental factors.
On the monetary policy side, there is room for some rate cuts, but not a huge amount. So that could provide a sentiment kicker a bit in Q1 but it can’t make a material difference going into entire 2013 and 2014.
Broadly, the market has been in a range for the last two years; about 4,500-4,800 at the low end and 6,200-6,300 at the high end. The negative aspect of 2011 was that we entered the year at the top of the range, so we closed it at the bottom of the range. The positive thing about 2012 was that we had started the year at the bottom of the range and we are perhaps closing the year close to the top of the range. So the year-end feels good. The challenge about 2013 will be that you will start the year at the top of the range, so let us see where we go.

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Q: In the last few weeks, a lot of interesting sectors have started to do well – real estate, select midcap pharma, media, textiles. Do you think this is just part of riding the market wave and you would still stay with the relative safety of FMCG, pharma even going forward?
A: There is a bit of both. If you see within the real estate space for example, which is generally considered to be high beta rate sensitive, people buy only when the market rallies kind of a sector. However, if you actually look at the components of which stocks in real estate have done how over the year, you will find there is a huge divergence.
Even when DLF was broadly flattish for the year, stocks like Shobha Developers and Prestige Estates got 40 percent gains for the year. Similarly in textiles, you will find one or two outliers generating meaningfully positive returns compared to the rest of the sector. Two of my core central views on the market for the last year and a half continue to be that we are in similar environment as 1990s and that it is a very bottom-up stocks specific market. It is not a thematic market; it is not a top down market though FMCG as a whole seems to have done well.
Similarly in pharmaceuticals, if you look closely, you will find stocks which have not done so well and there are bottom-up reasons for that too.
Banking is a beautiful example where few stocks have done fantastically well and few have done average. You can find reasons for all of these in bottom-up analysis. So, I wouldn’t build a sector approach at all. I would build a stock in a company approach going into 2013 too. Q: It has also been a couple of months where the market has become much more optimistic towards the stressed balance sheet stories like Suzlon, Jet Airways, Wockhardt. Would you would start looking at those sort of stories? Do you see signs of revival there?
A: Everywhere you will see signs of resolution. Wockhardt is an example where they managed to resolve the balance sheet issues, come out of it, start growing business strongly and the stock did well. When the hopes of resolution surface, the stocks start performing. If the hopes translate into concrete action, the performance can be large or you would go all the way back down. So, we have seen that happen many times in the past. Sentiment can take the stock prices up, but only upto a certain level. Beyond that, for spectacular upsides you need concrete results. So, yes, there could be few winners out of these stressed balance sheet scenarios.
Q: What about the primary market that has been in the dark even longer. Would you say that the time has come to start looking at some of the primary market issuances? Would you say Bharti Infratel is a good example?
A: I think so. It all depends upon the quality of issuances and the valuation. So there has been a positive of primary issuances in the recent past, but slowing investors are getting back to the scenario where they are accepting the ground reality as they are and trying to evaluate each investment proposals on its own merit. I am not so pessimistic on the primary issuances going into next year. I think it will be business as normal. Q: How many years out is that bull market? What do you think can trigger it and when will you think you can get more sanguine about a three-four kind of trend in equities?
A: If we actually get a good governance, good strong emphatic governance in the country in 2014 it might then trigger that bull market. At this point of time, the way I see it even before we reach the point of actually conducting elections in the country, there are expectations around elections which will start coming in at some point of time; next quarter, next year and that is going to appear negative. Any political analysts putting his pen on paper at this point of time will not be able to justify saying that we will get a strong mandate for any single party at the centre the next time. That itself will cause a lot of stress in the system. However, if the actual election results surprise and a single party gets a strong mandate so be it. Long-term I am very bullish whether the bull markets starts in 2014 or 2015. The next five to six years are going to be spectacular.
All of us are talking about a slowing economy, recessionary trends, tough times for everybody and all that, but a very interesting observation is, that through 1990s maybe through 1980s as well, gross domestic product (GDP) growth ranges to be 2 percent or 4 percent or 4.5 percent.
Right now what appears tough to us at 5.6-6 percent is higher than the top end of 1980s and 1990s. The country has definitely moved into a different level altogether. So, two to four percent has now become 5.5 to 8.5 percent or 5 to 9 percent broadly speaking. That will eventually show up in stock market as well as in terms of a long-term secular bull market. What we are seeing at this point of time is a cyclical adjustment to a very fantastic economic bull market, as well as stock as a class bull market of 2002 to 2008. Sometimes it takes a little bit longer than what we wanted it to be, so, we will have to bear it.