Stock-Specific Play The Right Strategy In Volatile Markets
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.