Market Notes 17.03.24

Indian markets. What to do. Global Markets. Bitcoin. Gold. Earnings Digest.

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. We may own positions in all stocks, sectors and indices discussed and can exit them without notice. You will very likely lose money if you use any information in this post without your own due-diligence.

Indian Markets.

The Indian markets are at an interesting juncture right now. Up until a week ago the markets were unabashedly bullish and while the bulls had nothing to complain, the bears were just about to give up. As it often happens in such a scenario when things get too lopsided, a natural mean-reversion can’t help but take place.

That is exactly what the swift correction we have seen in the last week is - a natural mean reversion to an excess move on one side. Why do i call it natural? Because it has happened only in pockets where they were excesses. While the smallcap index corrected about 10-12% from the top, individual small/midcap stocks have corrected 20-35% on an average. The Nifty on the other hand is just 2% away from the all time high and most large caps are not down from than 10% from their highs.

What happens from here?

What happens is also going to be quite typical. In a bullish phase the market doesn’t differentiate much between different stocks. The lowest quality of the stocks continue to go up on the smallest of the positive triggers. But once market participants get a reality check in the form of a swift correction, they wake up from the hangover and become alert to where the money should be deployed.

This happens across markets. Remember the VC mania phase in 2021 when every start up was being valued crazy and money was being raised left, right and centre. The subsequent correction woke up the VCs and suddenly the talk of importance of profitability started.

It’s important to recognize that the market environment dictates the risk taking behaviour of the same set of participants. Now that we have had a sharp correction, market participants will think twice before allocating to the riskier names. So what we will see going into the next couple months is stocks backed by genuine tailwinds and perceived good managements may continue to make an attempt back to all-time-highs but the story stocks will find it very hard to make a comeback. It will take them some time to iron out the overhead supply pressure. Some of the very shady names which were operated and were pure story, may never see a comeback unless a new story pops up in the same names.

Essentially, the market will now start differentiating between the good, bad and the ugly.

Going forward, they key event obviously is the election - a lot of newsflow will keep the market volatile for the next three months. How the market reacts pre-election is anybody’s guess but my own guess is that there will be choppiness and we will remain in this range. May be closer to the election once the exit poll numbers start coming we will get some trending action on either side.

The March quarter results are likely to be good but with the election event ahead, will be a bit tricky to play. There is some analysis that we may start seeing margin compression but i think typically Q4 is a strong top-line growth quarter so any gross margin compression may be compensated by some margin expansion due to operating leverage.

What should you be doing now?

I am no one to tell you what you should be doing given that i don’t know how you have structured your portfolio and what your strategy is. But generally speaking, this is a phase to not get in and out of positions based on news or individual stock movements, as you will be chopped. At the maximum, this is the time for switching out of stocks which were pure stories or which had questionable track records or both and getting into stocks which have genuine earnings tailwinds. This is because when the next bullish phase comes, the story stocks of the last leg won’t participate as market will find new stories. Only the ones with genuine earnings to back them will make a comeback. This behaviour can already be seen in the last two days of recovery.

Global Markets.

When i say global markets, i am essentially speaking of the US markets. No other market is really relevant to us.

The US market is going through the phase we went through in 2018-2020. A phase where only large caps do well, while the 95% broader market is languishing. Even within the large caps, there is just one stock that’s responsible for most of the gains and i am sure i need not even name it - i.e. Nvidia. Although i don’t operate in the US markets, i did put out a tweet about it.

The price then was 375. Today it’s closer to 900 - just in a matter of 10 months.

The rise of NVDA was driven by it’s exponential and surprise earnings growth led by AI investments being made by several large companies notably Meta and others. The stock of course seems too extended now and has probably priced in years of growth. But in markets extended can become super extended whether we like it or not but yes eventually things to come back to reality. Benjamin Graham encapsulated it perfectly when he said in the short term market is a voting machine and in the long term it’s a weighing machine.

Other than NVDA, none of the other US stocks are doing well. Amazon did report good numbers last quarter and is doing relatively ok but the rest of them seem to be in a mess. Tesla seems to be in the biggest mess going by it’s earnings and price action both. Unless the earnings pick up a lot of Tesla bulls will be disappointed.

The US 10Y yield has corrected from the highs of 5% closer to 4% now. Inflation hasn’t meaningfully come down to a level where the Fed is comfortable and the economy has been doing ok. Given that US has their presidential election coming up in Dec 2024, i don’t expect the US markets to see a major correction this year.

The US market is addicted to Fed which plays a big role. Unless the rate cut comes the US market and in fact most of the global markets will remain range bound. Typically we need a sizable negative economic event to happen which triggers or forces such a rate cut and from there a new bull market is born. Let’s see how things play out.

Gold.

If you have not observed, gold has hit an all time high after many years. This has been due to an anticipated dollar weakness which should come into play as the Fed begins its rate cut cycle and a lot of central bank buying. As geopolitics is getting murkier, many countries like China and Russia seem to be buying more gold. So both these tailwinds have propelled gold to an ATH.

Bitcoin.

Crypto is back. I have not yet seen a proper use case for crypto in the real world other than “store of value” for BTC - it remains an asset class where a lot of people especially the younger ones seem to be interested . Like i have always maintained in this blog, if you want to do crypto stick to the leaders i.e. BTC and ETH. Even then in India the regulations around crypto are so onerous that i am not sure for someone in India if it even makes sense. I am no expert here so i would refrain from writing much about it, except that avoid getting into the lower rung coins unless you really really deeply know what they are or unless you are very smart and seasoned trader who knows how to manage risk.

BTC is back near its highs. This move has been driven by introduction of an ETF for bitcoin. This etf has led to a lot of liquidity into the BTC which explains the move. Beyond that i have no idea.

Earnings Digest.

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. We may own positions in all stocks, sectors and indices discussed and can exit them without notice. You will very likely lose money if you use any information in this post without your own due-diligence.

The Q3 earnings season was a decent one but not great in terms of the breadth of ideas Some of the names that stood out for me - in no particular order:

1. Schneider Electric - Makes a comeback after being on the list. Some capex companies like ABB, Siemens, Cummins have made a comeback this quarter after being subdued for last few quarters.

2. OFSS - Significant expansion in topline and margins - and while similar acceleration in numbers may not sustain, the company seems primed to go to the next level. Even Oracle in the US which is the parent is doing well.

3. Cochin Shipyard - Second quarter in a row it is making the list. Mazdock also came out with stupendous numbers but the price hasn’t reacted yet - likely because of the overhang of promoter stake to be brought down to 75% from 80% odd now. The defence shipyard companies have been taking a breather but should do well over time once the execution of their large order books starts gaining traction.

4. Action Construction - Pick up in across the board infra activity is clear when names like ACE show up with strong numbers.

5. Interglobe Aviation - Anyone who has been travelling on flights - this should come as no surprise. There just is no competition out there. Overhang has been consistent promoter selling.

6. Zomato - First profitable quarter. Zomato is an indirect play on the entire Indian restaurant space - which is a huge market.

7. Trent - Blockbuster numbers led by Zudio.

8. Nuvama - Great numbers with a secular tailwind behind it.

There were many more but i will stop here. Also there are several opportunities in the mid and small cap space which qualify every quarter. Like i say every time, these are not recommendations but just examples for you to analyse.

Thank you for reading.