Market Notes 03.12.23
Euphoria. Stuck Portfolios. Global markets. Earnings Winners.
Euphoria.
The state election results are just out. They are a surprise and Markets love surprises.
The biggest risk and the biggest tailwind for our markets was and still is the 2024 general elections. What these state election results have done is given a big big likelyhood to the markets that the current government, the current policies and hence the current bull market will continue. Markets love surprises but they idolize predictability!
What to expect next? Twitter and Whatsapp are already going Euphoric and rightly so. The feeling is similar to the 2015 election win. But the markets as always are smarter and the rally of the last one week across the board with Nifty hitting all time highs explains itself. A gap-up tomorrow is a given, unless, see there always an unless in the market because its always always probability game - unless there is some other over night event between now and tomorrow.
But what’s important is what happens next ? My own reading is that this event will lead to continuation of the current bull market with the sectors that have been doing well to continue to do better.
If i have to summarize the thesis of this entire bull market it’s this. Government spending. Or Government Policy directed spending. Across companies, across sectors the story has been government directed spending.
Railways, Defence, Renewables, Energy, Mining, Infrastructure, PSU Banks. The darlings and leaders of the current bull market are led by actions of the government.
The other pillar of this bull market has been domestic money. Expect it only to increase from here on. FIIs who have been very light on the Indian market and have mostly been selling will now have no choice but to be back. True FOMO should start now.
All this may sound very bullish to you because it is.
Yes the valuations are not cheap anymore. The cream is out. But thats how bull markets progress - on the back on higher and higher valuations till the weight gets too heavy for itself. But we are not there yet. As they say train has left from Kanyakumari and possibly reached somewhere in Maharashtra or may be Chhattisgarh :)
Legacy Portfolios.
A lot of portfolios are stuck up since last couple of years with private banks, chemicals etc - leaders of the previous bull run. Although they are cheap now and the risk-reward is very very good in some of them, they will underperform the sectors that are leading the current bull market.
If i have learnt one thing in all these years, its this - When in a bull market, participate in whats leading the market. Try to defocus from laggards. The laggards will always attract you but the outperformance will come only in the leaders. The time to get into them is when the bull market is extended and lethargic.
On an absolute basis they will do well no doubt.
Global markets.
Global markets are very easy to call nowadays. It’s all a function of the US 10Y yield. The day the yields started falling from close to 5% the rally is the US and European markets started. The bond markets are now expecting multiple cuts in the next year - if they don’t happen expect the US markets to correct once again. The last one week has seen a very good breadth thrust in the US markets but it may just be the year end Santa rally.
Remember US markets especially tech led the previous bull market so we cannot expect it to lead again. The big tech names look lethargic. The new leaders are not yet apparent for US and that goes not just for their markets but also their politics. They will have their elections in Nov-Dec 2024. Till then expect a ride which is correlated to what the Fed does and what the yield does.
Disclaimer
Nothing you read here, should be construed as investment advice. I do not know your circumstance and so please treat the below as nothing more than what my thoughts are, which are subject to change without notice. Please do your own work and consult your own financial advisor. You will very likely lose money if you use any information in this post without your own due-diligence.
Earnings.
This earnings season was good but not as great as the last one. As expected this season was mostly about margin expansion. There were some good ones which i list down below for you to study:
IFGL Refractories
Marksans Pharma
BSE - this was mostly anticipated and was a play last quarter not so much now post results
Neuland
HBL Power
Trent
Carysil
Cochin Shipyard
PFC/REC
Varroc
CDSL
Cyient
I have deliberately left out a lot of smaller names which came out with very good numbers as it may not be appropriate to list them here.
A lot of making money off earnings surprises actually happens when you have one great quarter and you buy the stock and the company then repeats it with an even better quarter and you’re in the position - that’s when magic happens.
I see a lot of people are now latching on the earnings surprises strategy which is a good thing for all of us but its important to understand that the real game is in the nuances. Identifying the ones with the good numbers is an activity that any screener can do - its the series of next steps that include how do you rate them, how do you pick the best out of the lot, how do you allocate, how do you manage or not manage the position during the quarter, what you do pre next results and post that. That is where the real skill is.
Hopefully another session where we can go deeper on this!
Enjoy the gap up tomorrow :)
Next session- when ?
Thank You 🙏