Market Notes 13.08.23

India, sectors, themes, earnings digest, global markets, faangs, crypto.

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.

Let’s get started.

Indian Markets.

The Indian market is facing an interesting dichotomy. Very much the opposite of the 2018-2019 phase. At that time it was the mid and small caps that were severely lagging the large caps and this time around it’s the opposite. The mid and small cap segment of the market is showing extreme bullishness with a very broad based breadth. What that means is that if you just owned the midcap or the small index which is a collection of 200-300 stocks, you are up by more than twice the Nifty 50. If you got your stock selection right then you are up by more than 4-5 times Nifty 50 in this period.

This is a huge out-performance.

That’s the past anyway, the big question is will it sustain?

I think the small and midcap segment has a whole has overshot a bit in the short term and i won’t be surprised to see some pullback and/or consolidation over the next few months. On what basis am i saying that? If we study history a typical small cap trend lasts for 30-40% from the bottom before it goes into a consolidation mode. We have hit that number last week so i would be ok if it takes a breather. A breather would be a good thing and should allow for a bigger gain to happen post the consolidation and base building.

Another reason why i am not so worried is that that SEBI has tightened the margins so badly (or goodly :)) that there is very little leverage unlike our older days back in 2016-17. DII flows continue unabated and most of the flows predictably are flowing to small and mid cap funds. But this time, the small and midcap funds are very cautious and have stopped lumpsump investments which makes me less worried than usual.

All these things tell me that while in the short term there may be a pause or a pullback or even a small correction, this is NOT a medium term top.

As always if a new unknown event comes into play all thesis goes into a dustbin. So always in the stock markets all analysis is on a as things stand now basis.

Another interesting aspect of this market is sector rotation. Those who have seen past bull markets know that, this is how bull markets operate. A few sectors do very well, which then pause and pass on the baton to some other sectors which do well and then they pass it on another set of sectors and finally the first set starts moving again after 6-8 months. You see this being played out over the last several months.

In this newsletter we have covered several sectors that are the theme of this bull market much in advance. We spoke of infra, railways, capital goods, defence and tier 2 financials back in January and those are the sectors which have led the market up. A relay race or pass the baton can be observed amongst those sectors.

The past doesnt matter anyway. Where is likely to be the action now?

Sectors/Themes

The new major sector that’s coming to the forefront is PHARMA. After being beaten down for the last many years the earnings and the outlook both are turning for the good. Expect many stocks in this sector to get re-rated over the next few months.

Another theme which has come to the forefront but has run up quite a bit already is SMART METERS. This is a once in a lifetime game changing reform for many of the smaller companies in this segment - i am not surprised by the price action. Will they execute? Only time will tell but markets don’t wait for the execution, they price it in and then course correct as data comes in.

Earnings Digest

This earnings season hasn’t been as good as Q4FY23.

Some of the earnings that i liked this quarter:

1. Jyothy Labs

2. Talbros Auto (Liked it from last Q)

3. Zen Tech (Liked it from last Q)

4. HBL Power

5. Godfrey Phillips

6. Dynamic Cables

7. KSB

8. Elantas Beck

9. SML Isuzu and Force (Liked force last quarter)

10. Kukoyo Camlin

11. Ajanta Pharma

12. Genus Power

13. ITD Cementation (I think this too was good last quarter and this was a repeat)

to name a few.

I would like to reiterate the disclaimer here.

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.

The idea here is not to give you “tips” or stock names that you can buy or sell randomly, but you introduce you to the nature of earnings re-rating. So please use this material to go back and study how you could have analysed these earnings and how you can apply these principles in the next earnings season.

Some the stocks listed above have had a large rally and one would be foolish to buy them blindly now after the big move. Buying is easy, it’s more important to know how to sell the earnings winners. It needs a consistent effort over 4-5 earnings season to get a good hang of things. Put in the time. If you have any questions will be happy to help.

Global Markets

Let me close with the global markets.

The NASDAQ had an amazing rally off the bottom driven by the improvement in earnings of the big tech names. Some like META turned around big time vs what was anticipated. However given that the stocks had already rallied pre earnings in most cases the stocks pulled back post the earnings announcement as there was limited or no surprise. Also the macro situation in US is not so great with yields back near the highs. Expect the global markets to remain choppy and the big tech to go sideways for several months.

I have maintained on this newsletter than the FAANGs are old stories, they are at trillion dollar market caps. Don’t expect fireworks like we did in 2021 which was a once a decade euphoria led by Covid driven revenue gains for the tech names.

If you have to, look for new names in the US markets which will be the future leaders.

Crypto is more or less dead with no real action either on news or prices. Bitcoin and ETH are surviving and most shit coins like DOGE are 90% below their highs.

Until next time.