Market Notes 31.08.24

India, US, 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 general elections are over, the budget is done with. There is no major local event on the horizon and as such the markets although are at all time highs, it doesn’t feel like they are at an all time high. The market is in a one step forward, one step backward mode. Traders call it chop. Investors call it consolidation.

Either way, suffice to say that the market is in a frustrating zone - frustrating both the bulls and the bears. This type of a choppy, consolidating and frustrating market environment is more dangerous than an out an out bear market. This is the period where those with lack of patience and experience can end up making a lot of costly mistakes by trying to get in and out of names because they are “not moving”. The key in this environment is to bide your time and not unnecessarily disturb the portfolio to get some action.

What the investors have to understand is that we’ve had a good 1-2 years in terms of price performance and it is natural and expected for the markets to have 1-2 subdued, even negative years. This is par for the course.

Some people feel that we are in a bubble. I don’t think so. Except for certain pockets of the markets like SME or certain microcaps etc, broadly the markets can be categorized as to be in an above average valuation zone but certainly not in a bubble territory. The large caps are in fact trading at very average to below average valuations and most of them have hardly given any returns in the last 2-3 years.

I would generalize and say the large caps are in a safe green zone, midcaps in a yellow zone, small caps in amber and microcap/SME in the red zone. Of course stock specific exceptions will be there in each category but this is a broad characterization.

In my note just after the exit polls and before the election results i had mentioned:

The last line did play out and expectedly there are ramifications whether we like it or not.

Sectors like Defence, Railways etc which had led the bull market over the last couple of years have expectedly taken a break. Expect more consolidation in these and perhaps an outside chance that they have even topped out. All said and done, the fractured mandate that the general elections have given us have punctured the out and out bullishness in sectors like defence and railways. Expect a slow derating of multiples while the earnings may very well continue to be robust. Certain sectors like power, electronics manufacturing which are not 100% govt dependent may continue to make new highs after a brief period of consolidation led by above average earnings growth.

Global Markets.

The numbers of the big tech haven’t been so great but also not very bad. US market is now driven by only two factors:

1. The FED

2. NVIDIA

The Fed has finally signalled that the first of the rate cuts may come in September. While this was expected and hence should not lead to a big upside, the potentially easy liquidity environment should prevent the global markets from correcting big time.

NVIDIA declared fairly good numbers but give the scale of numbers, the best may be behind them. If they come out and surprise even at this scale of numbers then that will be nothing short of a miracle. I think the story has played out to a large extent. Its a grossly over-owned stock now and if anything should be a market performer. Then again i am not an expert and US tech can be a crazy place, so keep an open mind.

The real story in the US market right now is in the small caps which after years of under-performance are showing some life. If the rate cut comes through and the economy is stimulated then expect the US small caps to outperform big tech over the next few quarters.

Q1 Results.

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 result season was quite dull. Blame the elections as most businesses went slow, ordering came to a standstill and generally the growth suffered. As per most mgmt commentary Q2 and Q3 should be much better. Some results which stood out for me:

1. Balu Forge

2. SMS Lifesciences

3. Inox Wind Energy

4. Gravita

5. Century Enka

6. Symphony

7. Strides Pharma

8. Tips Industries

9. Lupin

10. Sportking

11. BASF

12. BSE

13. Pearl Global

Of course this is just a partial list. There were many more names which did really well in term of earnings. Like i say every time, these are not recommendations but just examples for you to analyse.

To conclude, like i said we are in a different and difficult environment that what we saw over the last eighteen months where adventure and action paid off handsomely. The market is in a figuring out what to do next phase. In such a phase it’s best to stay put and not do anything adventurous. Focus on companies with earnings tailwinds which will sustain at least over the next few quarters and avoid a lot of churn. Look for new sectors and neglected stocks. If you do this you should be fairly safe.

Until next time.

Prabhakar.