The present market rally is a response to the high level of pessimism seen in prices when they went down. Many blue chips were available at distress level valuations. But investors saw this as an opportunity. What really changed the track for the rally were institutional flows, says Tarun Sisodia, director, head of research at Anand Rathi, in an interview. Excerpts:

Now that the earnings season has started with Infosys results, do you think the performance will be similar in other sectors too?

We expect a 10 per cent year-on-year (y-o-y) decline in profits for Nifty 50 companies. If we exclude the energy sector (as they would gain from oil bonds), the profit decline is much worse at 24 per cent y-o-y compared with the December 2008 quarter.

The sales growth for Nifty 50 would be almost negligible. This is mostly on account of slower economy and de-growth in exports. A bigger burden is likely to be felt by companies on account of margin squeeze, as commodity price deflation takes a lagged impact. The oil & gas sector is expected to benefit from oil bond issuances, thus impacting profit growth positively by 43 per cent y-o-y. Other sectors expected to grow are consumer (16 per cent), industrials (7 per cent) and telecoms (7 per cent). Materials, automobiles (especially commercial vehicles), healthcare and financials are likely to lag in growth.

Recently, the market rallied by 38 per cent. Do you think it’s a bear market rally or has investor confidence returned?

We think that the current rally is a response to the high level of pessimism in prices when they went down. Many blue chips were available at distress level valuations. Investors saw this as an opportunity. What really changed the track for such a steep rally were institutional flows. Cheap valuations, positive flows and short covering are responsible for the current rally.

Having said that, we expect some fundamental levels of stress in earnings till December 2009. We expect growth in profits in Nifty 50 to be only 1.6 per cent in financial year 2010 and possibly at 15 per cent-plus levels in FY11. Thus at PE of 13x (on FY10 earnings), the markets are not really very cheap, considering muted growth. Given the weak fundamentals, we believe that the current rally is a bear market rally rather than return of confidence. Nevertheless, it is unlikely that markets would witness previous levels of lows.



What impact will the elections have on the stock market?

The election outcome prediction is best left to other experts. We don’t predict the outcomes. From a market perspective, any strong coalition government would be treated as a positive. They would not care for the coalition mix (Congress-led or BJP-led). Any strong government likely to last its tenure would be viewed positively, while a hung Parliament or the Third Front may not be seen as a positive development.

Which sectors and stocks are expec-ted to outperform or under-perform in the short term?



In the near term, we see infrastructure and the rural story playing out as a theme. Companies or sectors linked to these would do well.

By when can we expect some recovery and see the banks lending again?

Recovery in economies across globe is likely toward the end of 2009. That could trigger a change in sentiments at least three-six months before the event. So, one must brace for improvement in sentiments toward the middle of the year’s second half. That would also be the period when banks would become more aggressive lenders.

what right mix do you advise to your clients? Are you bullish on equities compared with debt?

Any correction in equity markets should be used to increase exposure to equities. Gold must remain a part of portfolios (at least 10-20 per cent exposure). The mix between equity and debt would be determined by an investor’s risk appetite. We do recommend increasing allocation to equities in these volatile times only for investors with long-term holding horizons.