Moneycontrol Pro Weekender | Proof of the pudding lies in the earnings

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Dear Reader,

India’s long term structural growth story is one that’s undeniable. It’s been recognised within the country and outside, by economists, financial markets and even multi-lateral institutions. But the mood in the market has turned a bit sombre, leading to some introspection on the causes. A big elephant in the room is China’s power-packed stimulus that it announced in a series of daily measures before it closed shop for a week from October 1 to celebrate the Golden Week, the founding of the People’s Republic.

This holiday period saw Chinese stocks listed on HKEX turn gung-ho with domestic investors rushing in to capitalise on the momentum and even foreign investors shedding aside scepticism to reroute flows. Meanwhile India’s markets wilted somewhat during this period, although what is a month when the markets have been rising for years now is a good question. Suddenly, India’s allure was no longer enough it appeared and the Orient’s mystique beckoned once again.

But the typical front-loading of expectations that is the wont of marketmen collided with radio silence from the Chinese government after markets resumed. We won’t march to the drumbeats of the markets, they seemed to say. This time it was the turn of the Chinese markets to wilt and we wondered if it was a flash in the pan rally. The Hang Seng Index has fallen by 11 percent from its peak on October 7 till Thursday. Continuing our coverage of China, we did write about how economics comes before politics for the country.

Whether it was the fall in Chinese equities or something else one cannot say, but China’s finance ministry scheduled a press briefing for Saturday. Chinese stocks perked up on Friday but not by much. The words ‘intensifying countercyclical adjustment of fiscal policy’ in the agenda seems to have lit up the macroeconomic worksheets all over again.

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But the point for Indian investors is that China’s pain did not really turn into India’s gain, with the Nifty 50 ending with a measly 0.7 percent gain over Monday. Why would markets fall when China’s star was in the ascendant but not claw back somewhat respectable gains when it fell? It’s not really adding up.

This week the RBI, as expected, did not cut rates but signalled a shift in the Monetary Policy Committee’s (MPC) stance to neutral, meaning it had now got into position to cut rates when the situation turned right. That’s not as good as a rate cut but still the best outcome given circumstances, as we wrote prior to the policy here and here. After the policy was announced, we wrote on the timing and pace of rate cuts and impact here and here, as the shapeshifting monetary animal of inflation turned into a lean horse from an elephant.

A clue on what else could be worrying investors came from this week’s chart of the day, an insipid earnings season. While Nifty 50 companies are expected to post a 2-4 percent YoY increase in earnings “Earnings expectations of companies outside of the Nifty 50 index are muted as well. Motilal sees little change in aggregate earnings of the companies under its coverage. Kotak is projecting a 1.9 percent growth in earnings for companies under its coverage. Elara Securities warns that companies under its coverage can see a year-on-year drop in earnings at the aggregate level.” If the first half of FY25 is a washout in terms of earnings, then the full year consensus earnings growth of 13 percent will require a sharp turnaround in fortunes in the second half, it appears. Will we get there is a big question.

PMI data too has been pointing to a deceleration in both industry and services but the index itself remains comfortably above 50, the level that separates contraction from expansion.

While events such as what the US Fed will do and what that means for flows, China’s return to favour or not among global investors, geopolitical heating up are events that we can blame on non-controllable external factors, lack of earnings growth is an internal problem. The pressure is seen among a few sectors, such as oil and gas, fuel retailing, metals and cement companies. But TCS’s results also proved to be below expectations on both revenue and margin fronts. Still, we wrote that the commentary is positive on demand reviving as the macroeconomic situation in its main markets improves and it makes sense to look beyond the results.

In some ways then, we need some big rabbits to be pulled out of the earnings hat in the ongoing earnings season. That can change the narrative of flat profit growth and how elevated valuations don’t make much sense in such a scenario. Alternatively, management commentary must lend confidence that an earnings recovery is round the corner, as in TCS’s case. Even then, the IT bellwether’s shares were down by 2 percent on October 11. If investors move to a stage where they say, let’s see the earnings growth first then equities may move into what market people politely call a state of time-correction. They won’t fall dramatically but not move up either, with the opportunity cost –such as keeping money in a FD—mounting.

Cheers,
Ravi Ananthanarayanan

Your regular Weekender writer Manas Chakravarty is on leave and will be back next week.

Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Investing insights

Kaynes Technology , Titan Company, Are bank deposits making a gradual comeback?,
Garuda Construction and Engineering IPO, NBFC Q2 Preview margins, Krsnaa Diagnostics,
Manappuram Finance, Godrej Consumer, Amber Enterprises, Sundaram Finance, Logistics sector: Cruising along the road to profitability, Weekly Tactical Pick, NTPC.

Obituary

Ratan Tata, leading Indian businessman, 1937-2024

Trackers

Pro Economic Tracker: Auto sales rev up, but consumer sentiment, power consumption decline
Monsoon Watch: The 2024 rainfall season ends with a healthy surplus

Politics and Trade
How critical is India’s mineral pact with the US?
BJP stands taller after Haryana poll showing, disunity hurts Opposition
The Eastern Window | Whether it's Trump or Harris in office, US policy on Middle East will be written in Tel Aviv

Markets
Shaktikanta Das’ warning on ‘growth at any cost’ is an eye opener for aggressive MFIs
MPC signals monetary easing; time and size of rate cuts hinge on inflation
Chart of the Day: What is the Mcap-to-GDP ratio signalling about equity valuations?
How should investors deal with the war's impact on oil, equity markets?
GuruSpeak| Gaurav Chopra, a techno-funda investor who has mastered both worlds
Chart of the Day: The two worries that kept the RBI from cutting rates
As RBI relents on policy stance, what is the outlook for Indian equities?
Moneycontrol Pro Market Outlook | Markets ripe for a bounceback

The Interview

We expect GDP growth rate to slow to 6.1 percent in FY2025: Nikhil Gupta, chief economist, Motilal Oswal Financial Services

Insights on Companies and Sectors

As JLR’s sales hit the skids, is an earnings downgrade imminent for Tata Motors?
Chart of the Day | What's driving logistic sector's growth?
As investments rise at Sun Pharma, watch out for impact on profit margins
Warm outlook for FMCG companies has suddenly turned a tad cold
Under a new owner, Glenmark Life Sciences aims to shed past constraints
Solving the oilseeds riddle
RBI’s draft norms on bank subsidiaries take aim at plugging regulatory holes

Pro Exclusives

Smaller PMS firms see MFs emerging as competition with 'new asset class' products
Biggest IPOs of India: Did they help investors make money?
Valuations in defence sector are comparatively high, but there is growth to justify: Fund manager
How aggregator platforms are bringing the Ola-Uber model to inter-city bus travel
GCC industry seeks higher infra investment for success of 'Beyond Bengaluru’ push
Valuations in defence sector are comparatively high, but there is growth to justify: IDBI Capital’s Amey Belolkar

Financial Times

China’s real intent behind its stimulus inflection
Google break-up reads like antitrust fan-fiction
Overreaction watch, no-landing edition
US foreign policy is too volatile to lead the worldNew titans of Wall Street: How Jane Street rode the ETF wave to ‘obscene’ riches

Personal Finance

Personal Finance | Should you add sectoral and thematic funds to your portfolio?