Stock-Spe­cific Play The Right Strat­egy In Volatile Mar­kets

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Bulls con­tin­ued their charge dur­ing the week, de­spite strong blows from bears, this time on stock-spe­cific moves. In­dian bench­mark in­dices moved side­ways ahead of cor­po­rate re­sults. De­spite GST has­sles, the com­pa­nies that have de­clared re­sults till now have per­formed bet­ter than the street es­ti­mates in their Q1FY18 earn­ings, which boosted mar­kets to reach all-time high levels. An abrupt nose­dive by heavy­weight ITC be­cause of GST Coun­cil’s ver­dict to im­pose ad­di­tional 5% com­pen­sa­tion cess on ci­garettes, apart from 28% GST, was off­set duly by short cov­er­ing in ITC and fresh buy­ing in pharma stocks, specif­i­cally Aurobindo Pharma. Im­prov­ing out­look on quar­terly re­sults and strong do­mes­tic macros en­cour­aged FIIs to yet again pour their money into In­dian eq­ui­ties. More­over, the big­gest res­cuer, Life In­sur­ance Cor­po­ra­tion is said to have mulled pour­ing a min­i­mum of Rs 4 tril­lion dur­ing FY18, af­ter post­ing steady pre­mium in­come for three quar­ters in a row. LIC’s net pre­mium in­come dur­ing March quar­ter stood at Rs 99,542 crore, while that of June quar­ter it was Rs 150,000 crore.

In­dian bench­mark in­dices are be­com­ing ex­pen­sive at a price-to-earn­ings ra­tio of nearly 25 and price-to-book value of 3.5, i.e. at 1.2 times the 5-year his­tor­i­cal me­dian. This makes In­dian mar­kets costlier than most other global bourses, in­clud­ing the US. When com­pared with the early 2008 val­u­a­tions, In­dia still holds a long way ahead, but com­par­ing cur­rent mar­ket con­di­tions to the decade-old bench­marks is of no use. More­over, com­par­ing In­dian in­dices with the world mar­kets may have some link­ages in the near term, but over the long-term, mar­ket val­u­a­tions work in iso­la­tion.

Till then, we have plenty do­mes­tic trig­gers like GST, RBI pol­icy re­views and cor­po­rate earn­ings that would drive the mar­kets in the days to come. The GST, though com­pli­cated, in­tends to re­duce the tax bur­den on man­u­fac­tur­ers and sup­pli­ers, who would pass on the ben­e­fit to ul­ti­mate con­sumers of goods and ser­vices and cre­ate ad­di­tional de­mand and thereby help raise coun­try’s growth rate by 2%. When link­ing GST to the cor­po­rate earn­ings, the Sen­sex 30 com­pa­nies, ex­cept SBI and Tata Mo­tors, would show 3.5-4% growth on a YoY ba­sis, af­ter post­ing not-so-good re­sults on pre-GST anx­i­eties. Oth­er­wise, on the sec­toral front, de­fen­sive sec­tors like FMCG, oil & gas, auto and power may show bet­ter than ex­pected bot­tom­line growth. On the con­trary, IT and pharma may show bot­tom­line de­cline even with ru­pee ap­pre­ci­a­tion dur­ing the last few ses­sions. Banks may post higher sin­gle digit credit growth, while NPAs too may grow but at a slower pace. Con­struc­tion sec­tor may see higher or­der val­ues.

Given that mar­kets are danc­ing to the tunes of stock-spe­cific earn­ings or news, we may see daily in­de­ci­sive­ness and in­tra-day volatil­ity, but our long-term view re­mains in­tact till our ma­jor in­dex Nifty sus­tains above the 9700-mark. We hold 10,700-11,200 as our pos­i­tive view, pro­vided Nifty breaches 9,930 level on a clos­ing ba­sis. How­ever, traders ought to re­main cau­tious of an abrupt stock-spe­cific move, while in­vestors have a golden op­por­tu­nity to buy on dips and sell at highs.

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