It’s not all hunky-dory out there. Earnings are critical to investors’ long-term returns, and that may yet again prove to be elusive. One consolation? The lower base of Q4 FY15 may make even the weakest earnings growth look much better. Analysts have worked out the numbers and it seems we are on course for a small revival in earnings – because of lower base and lower input costs.
And because its earnings season, sharp stock price movements are going to be all too common. Stocks run up in anticipation of good earnings before the results. But a disappointment can lead to a severe correction. On occasions, stock prices stay poised before earnings are announced, only to see a big lift off if there is positive surprise.
Earnings seasons are all about surprises either positive or negative, especially fourth quarter which normally sets the tone for the next four quarters. Expect the markets to, therefore, swiftly reward companies with good earnings, and hammer the poor earners. So, if you are on the right side of the call, you could be in for some short-term profit treats.
But the broader markets are not quite in the mood to keep cheer going. While March was one of the best months for the markets with a 13 percent gain, the start to the new financial year has been downhill. In the first week of April, the BSE Sensex tumbled 726 points.
Foreign investors are turning marginal sellers having offloaded stocks worth Rs 1,040.14 crore in April. If the drizzle turns into a shower, the broader markets could take a further beating. Foreign investors have been the backbone of the market rally that was seen the last month because domestic investors still continue to be on the sell mode. Outflows from domestic funds exceeded Rs 6,000 crore last month.
But there are signs that foreign investors may be booking part profits because the signals from the overseas economies is that the liquidity pipe will continue to flow for some time. The US Fed is widely expected to keep rates steady in April, but a hike in June is not ruled out when it meets next. The risk-on trade which takes place when global rates are low seems set to continue.
Ultimately, the bigger challenge for the Indian market is to see a meaningful earnings recovery. The RBI’s 25-basis point rate cut may finally see a transmission of interest rates into the economy. If that happens, producers and buyers will be spurred make more borrowings to drive demand and increase production capacities. But the bigger revival is still a long way off.
As the economic growth has been anemic as the IIP numbers are not meaningful enough to applaud about, there will be lesser number of earnings winners this season.
Companies that do manage to grow in this environment will have earned their stripes. Industry performance will go to the ones that have lower capital requirements. Lower input costs, in these times, are a positive. But the companies to watch are those that have a robust demand and pricing power of their products.
BW Reporters
Having addressed business, stock markets and personal finance for the last 18 years, Clifford Alvares has ridden the roller-coaster markets - up close and personal -successfully, traversing the downs and relishing the rises. The greater part of his journalistic ventures has gone into shaping articles about how to shape portfolios