Outside of IT, pharma and FMCG, it is better to be net short

The early bird first quarter 2013-14 results have tended to confirm consensus estimates. Dollar-earning currency-related plays such as information technology (IT) and pharmaceuticals sectors have done well and been duly rewarded. More currency-related plays will emerge from these two sectors. Automobile major Maruti will almost certainly benefit from a “reverse currency play” as its yen-denominated costs drop.

Some companies have benefited from lower interest costs. These include banks, which have expanded net interest margins, by refusing to pass on policy rate cuts to customers. However, banks are receiving short shrift since the RBI has started tightening money supply again. There's a sense that FMCGs, which tend to be low debt, will do well, though this is unconfirmed.

No corporate so far has delivered a big positive surprise in its core business. RIL managed to generate other income via its war-chest. L&T missed its profit estimates by quite a lot. BHEL has seen heavy selling and de-rating by securities analysts ahead of results.

The industrial metals sector is heading for a series of successive new 52-week lows in tandem with lower global commodity prices. Auto sales dipped through the quarter and it's unlikely that auto majors have generated higher profitability, apart from Maruti. Infrastructure seems to be in trouble – it's unlikely L&T would have delivered poor results if infra was going strong. Realty has taken a hammering and it's likely to take more of a beating if interest rates don't fall.

The Nifty is up about four per cent in the last 20 sessions. That's due to the IT, Pharma and FMCG sectors. But the Nifty Junior has flat returns in the same period and so do the midcaps. The Bank Nifty is down nearly six per cent, despite bouncing from lows.

One of the broad filters for a trader is to align with the market's overall trend. That is, be net short in a downtrending market and net long in an uptrending market. What is the overall trend here, however? If one relies on the Nifty, it's up. If one goes by Advance-Decline ratios, or the broader indices, it's either down or sideways.

My instinct is to assume the overall market trend is down, or very close to a peak and reversal. Two pointers suggest that a large number of positive Q1 surprises are now unlikely. One is that 130-odd companies across many sectors have already declared results and most of these are market leaders. This sample is broad enough to suggest that there hasn't been much outperformance, apart from dollar-earners.

The second major pointer is the low liquidity regime. Foreign institutional investors (FIIs) have been sellers for the past two months. Tapering of QE3 sooner or later, is a given. Hence, FIIs are not going to go seriously “risk-on” again. At the same time, Indian institutions are short on liquidity. Mutual Funds have been hit with redemptions. Bank credit is tight. Outside of IT, pharma and FMCG, it is better to be net short.

The author is a technical and equity analyst