Market turnaround is always led by a new set of stocks

Even emperors cannot rule forever. This may be especially true in the stock market where sectors are darlings in one rally but damned in the next. Murali Krishnan, head – institutional broking, Karvy Stock Broking, for one, believes that any market rally will have to come from a new set of businesses. But that doesn’t mean he is breaking away from the old ones just yet. In an interview with Sachin P Mampatta, he explained why defensive sectors still look good, the structural issues facing the rest of the market and where to look for the winners when things finally turn around. Edited excerpts:

What do you make of some of the steps taken by the government on Friday?
The withholding tax was expected.

And the Rajiv Gandhi Equity Savings Scheme?
Usse zyada farak nahi padta....Unless there is an alternative option to beat inflation which is not so volatile, money will continue to go into gold.

How would you rate market sentiment?
Market sentiment has improved, but nothing has changed. Structurally, the damage is still there. It will take a while to come out of that.

What kind of structural damage are we talking about?
There are asset quality issues in the banking sector. Infrastructure faces funding problems. And yes, inflation is another sticky area. Diesel price hike is good, but is not enough. It’s too little, too late.

It’s possibly showing the intention and possibly, perhaps the larger issue was avoiding a downgrade. A downgrade would have been more damaging than any structural damage.

There seems to have been a shift away from defensive sectors in recent times, are they gearing up for a bigger fall?
I don’t see much downside, probably another 10% correction, before they reach buy levels. Earnings are showing stable growth for these companies. I don’t see a major shift away from them.

Do you see downgrades for other sectors?
Downgrades wouldn’t surprise me, especially IT (information technology). I do not see much of an earnings downgrade for the rest of the market, possibly flat earnings.

In terms of sectoral preferences, is there anything that stands out for you?
I still like some private sector banks, some FMCG (fast moving consumer goods), midcap consumer and midcap IT. I have been bullish for quite some time on certain stocks in the midcap infra stocks. I am also bullish on some pharma largecaps.

I am looking at sectors that will outperform and have stable earnings growth higher than the Sensex. Other sectors don’t seem to be doing it because they are still not out of the structural damage that they have sustained. Statement of intent is different and balance sheets are different.

What are some of the things that need to change before this damage begins to heal?
Basically, crude should come back to $95-98. The rupee should come to Rs50 against the dollar. Interest rates and inflation should come off. GDP growth should be stable at 6% to 6.5%.

Could the Reserve Bank of India  help with growth?
Our estimate for rate cuts for the year is 75 basis points (bps). They have given 50 bps. Hopefully, by November, they will give the balance 25 bps, maybe, under duress because CPI inflation is still over 10%. Unless that corrects, I don’t think Subbarao is going to do anything.

What does that mean for growth going forward, if interest rate continues to remain high?
Growth will be affected. The capex cycle will not start. Then, your GDP compression will be there at 5% to 5.5%. We will be back at the Hindu growth rate. The multiplier effect will come off.

How much of a positive impact could the pick-up in the monsoons be?
The monsoons have ended up being fairly okay. Normally, there are Rs25,000-30,000 crore in supplementary grants during the monsoon session. It is an annual phenomenon where they pay state governments where the monsoon has been below normal. It has not passed because the session was not held. I do not know if they will pass it later, if they do not pass it, it is another saving on the fiscal side.

Any sectors you would rather avoid right now?
I still think capital goods is in deep trouble. I think with the coal block allocation getting cancelled out, most of the power projects may get stalled. Orderbook cycle will take a hit, incremental orders will fall off. So, capital goods and associated plant equipment supplier will all be in trouble.

How does one go about picking winners in a market turnaround?
The rally is always led by a new set of stocks. In a growing economy with expectations of 8% GDP growth, there is always growth stocks that will do well plus the funding stocks, i.e. the bank stocks.

Services as a segment has become mature now, a commodity business. Services is not going to lead you anymore. Obviously, what is going to lead is the infrastructure or a capital goods or a bank. Banks will always be part of the growth story because they are the founders of the economy. If the economy does well, the banks have to do well.