Dear Reader,
Quarterly earnings are a constant in the market. The news may be good or bad, but it will be there. Sometimes they don’t matter much for valuations. For instance, when a liquidity tsunami lifts stocks to bizarre levels or when a drying up of the same liquidity drops it with a thud, earnings are a side show.
But in times such as the present, they tend to matter a bit more. Central banks are pondering when rate cuts should land. Some of the world’s major economies are due to go in for elections in 2024. The economy takes a backseat as returning to power and the election outcome’s after-effects take centre stage. The Chinese economy is in no hurry to bounce back. Geopolitics remains an uncertain risk. Then, some new unknown will let loose some chaos, if the past is any indicator. The recent Red Sea crisis is an example.
But, in earnings investors can trust. Of course, events such as geopolitics and economic growth do have a bearing on earnings and the corporate outlook. But, for Indian investors, broadly speaking, the country’s seen as being in a sweet spot, being the fastest growing large economy. Global investors are increasingly spotting it on their radar and seeking a larger share of the promised spoils.
For instance, Blackrock’s recent weekly investment commentary highlights India and Mexico as two markets where it’s seeking out companies that can benefit from ‘mega forces’— structural shifts that can drive returns. It sees India benefiting from demographic divergence, and ‘India’s talent pool, start-up ecosystem and software firms with a global footprint’ make it an upcoming hub for artificial intelligence. Digital disruption and AI, it says, are also drivers of earnings growth, which convinces it to look past the fact that 12-month ahead, valuations are the highest in 20 years.
A recent Morgan Stanley note on global tensions has this to say about India: “But elsewhere in Asia—particularly in standouts Japan and India—positive long-term trends should drive markets higher. These include fiscal rebalancing, increased digitalization and increasing shifts of manufacturing and supply hubs in a multipolar world.”
As a domestic equity investor reading this newsletter, you may say they are preaching to the choir or better still feel fortunate at having got in before they did. But the point is also that, eventually, valuations will be tested against performance and making tangible progress towards these milestones that global investors believe lie ahead for Indian companies. The most transparent measure there is, however imperfect it may be at gauging future performance, is quarterly earnings. The numbers and management commentary need to add up to send the right signals.
On that note, in today’s edition, we have two articles on what the December quarter earnings say. One strips out the effect of inflation on sales growth, giving us real sales growth. Our Chart of the Day reveals that non-financial services real sales growth in the December 2023 quarter was higher than in the year-ago period, and also compared to the December 2019 quarter (pre-COVID). A similar trend is visible in manufacturing, too. However, it’s lower than the December 2018 quarter. Now that’s the climb that markets are looking for, to see growth go higher.
The second article analyses the December quarter earnings in more detail, analysing the sectors that did well and those that faltered. The short take: “Prima facie, the earnings season was solid with hits far outnumbering the misses. Domestic sectors held the fort.” For a sector-by-sector account, do read here.
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Ravi Ananthanarayanan
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