Defying numerous doomsday prognostications of the economy, stock markets are racing higher. The Nifty 50 has for a long time been hovering above 9000 levels, but gained momentum lately. In June, the markets have been up 9.5%, and have scurried as furiously as if on steroids.
Has market sentiment turned positive, then, despite the fact that Q1 results could be a wash-out? The first thing to note is that investors are now resigned to the fact that the first quarter figures will be just that, a washout. Many companies will report lower or negligible revenues.
With costs rising, several of them are even likely to report deep bottom-line cuts, particularly those with huge fixed costs.
Rebound? Or, corrective upswing?
Besides, this year’s Nifty 50 earnings per share are expected to contract. The Nifty 50 could even see earnings in the range of Rs400-450.
While the downside risk to these earnings is undoubted, this means that the markets are now quoting at stiff valuations. At these prices, many investors are overdoing their bets.
But as other asset classes such as bonds and real estate down as well, investors are taking punt with stocks. The direction of the 10-year yield is likely to be downward, and investors don’t want assets with such low yields, at least not yet.
Other avenues, such as real estate, are not moving much. Rentals are moving lower in commercial and residential. Prices will also follow suit. Gold has not been much of wealth generator lately, except for being hedge against rupee depreciation.
Speculators delight
Hence, investors are lured by the action in the stock market.
While markets have now gained, when first-quarter results are actually announced, there could be a knee-jerk reaction depending on how dire the situation turns out and how dicey the earnings are.
If banks report a huge setback in earnings, or rising delinquencies particularly in credit card and other loans, the markets could crack big time for a short while.
Covid-19 could compel other companies to make higher provisions for write-offs. Hence, the first quarter is likely to be ugly.
For investors, this means that the markets could be choppier. If they now race ahead, at elevated levels they could easily take a tall tumble on poor first quarter figures.
Look at how the Bank Nifty has done in the last few days. After being beaten down heavily during the last few months on fears of greater delinquencies, these stocks have shot up smartly in the last few days, giving a fillip to the overall market as well. With a weight of about 36% in the Nifty, financial stocks’ movements can exert considerable influence on the direction of the market.
Traders beware
Besides, India has seen one of the most stringent lockdowns in the world. That will soon show the huge impact on economic activity. So, even as the economy is beginning to re-open, normalisation of business activity is not seeing the desired pace just yet.
Some sectors could still face choppier business activity depending on how soon and how far supply chains resume.
Hence, it will not be a zig-zag market. If the US government follows up with another stimulus, markets could still remain elevated. But the action will be stock specific. Some stocks that see better revenues growth during these covid-19 times could be more sought after.
So, if you are investing, it’s better to invest in stocks that see some continuity in business even during the worst times.
