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Last Updated : Jan 18, 2020 10:43 AM IST | Source: Moneycontrol.com

Moneycontrol Pro Weekender: Buy the rumour, buy the news?

Market consensus estimates are as usual bullish, forecasting earnings growth of 26 percent in FY21 and 15 percent in FY22 for the Nifty.


Dear Reader,

With the United States-China trade deal, along with the usual histrionics from the US president, out of the way, markets are asking: what now?

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Commentary by economists has been ambivalent, but most say it’s underwhelming. The signing of the deal removes one excuse the markets used for moving up, since any phase-2 deal, if at all it happens, is likely only after the US elections.

Interestingly, while the rally in anticipation of the trade deal looked like a classic ‘buy the rumour, sell the news’ set-up, stocks have continued to move up. The reason, as we have said ad nauseam, is there’s a close correlation between central bank balance sheet expansion and the rally in equities.

The rally also takes heart from upbeat US economic news. The latest readings of the OECD composite lead indicator, which are supposed to anticipate turning points in economic activity six to nine months ahead, point to growth stabilising in most economies, albeit at below-trend levels. The one exception, unfortunately, is India, where the OECD lead indicators point to ‘easing growth momentum’.

Most forecasts though believe growth in India will be a bit higher next fiscal year. Market consensus estimates are as usual bullish, forecasting earnings growth of 26 percent in FY21 and 15 percent in FY22 for the Nifty.

Nomura Research says there’s a downside risk of around 4 percent to these estimates. But take a look at the accompanying chart - it shows how corporate earnings have invariably disappointed Street forecasts at the beginning of the financial year.

Will the disappointment this time be a mere 4 percent in FY21 and FY22, as Nomura expects?

earnings-beat

What the chart says is that analysts are a cheery lot. They start off with high expectations and then slowly reduce them over the course of the year. Why else have their forecasts never been below the final growth number, as the chart shows?

What about valuations? Nomura says the Nifty is trading at a year forward price to earnings multiple of 18.1, more than one standard deviation above the long-term average. They think 17 is a more appropriate multiple. We see no reason why valuations won’t remain high, as long as the influx of hot money continues.

Financials and telecom are expected to contribute the most to earnings growth. But will telecom companies and banks deliver?

With the Supreme Court ruling that telecom companies will have to pay up their dues to the government, telecom companies will be hard-pressed to find the resources. And if Vodafone-Idea collapses, banks could be left holding the can.

As the December quarter results show, not all the rosy projections about banks may come true and new fault-lines are being exposed.

The markets are hoping the rally will now spill over into mid-caps, which have started outperforming the blue-chip indices. We took a look at whether 2020 will be the year of the mid-caps and what investors should keep in mind. Our independent research team pulled out some promising mid and small-cap stocks here and here.

The results season is now on in full swing. We considered the main expectations of the December quarter corporate results. Our analysts looked at the performance of IT companies, from the possibility of a re-rating in Infosys to L&T Infotech firing on all cylinders. We checked out what D-Mart’s results say about its business model. And in our quest for value, we took a close look at the pharma sector.

High food inflation has led to rate cuts being taken off the table, but that need not be cause for alarm—the food inflation is probably temporary and in any case, monetary policy was proving to be pretty ineffective.

No wonder then that all eyes are now upon what rabbits Nirmala Sitharaman will pull out of her hat in the Union Budget 2020 and arguments for and against expanding the fiscal deficit are all the rage.

Counter-cyclical measures are hardly enough, though. The World Bank underlined recently that labour productivity in India is a mere 27 percent of the average in emerging economies, which in turn is less than one-fifth of the average in developed economies.

In these bullish times, the positive spin on that is that it leaves all the more room for improvement. After all, didn’t Jeff Bezos just say the ‘21st century is going to be the Indian century’?

Cheers,

Manas Chakravarty

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First Published on Jan 18, 2020 10:13 am
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