Investors Should Focus On Earnings Outpacers

Sharp swings of over 400 points on one day followed by an equally pointed U-turn the next may be quite unnerving to investors. But in a richly-valued market, and in the ongoing results season which continues to churn out results that surprise D-street analysts, such choppiness part of the package.

Last week, the Sensex attempted to jump over the crucial 26,000 hurdle, but the resistance was stiff and the markets could not take it out. Stocks are showing pretty much range-bound movement, and that may continue for some time till the results season is done with.

Results of private-sector banks have been a mixed bag. While some private banks posted stellar results, others had to contend with huge provisioning with saw their net profits dropping such as Yes Bank and ICICI Bank. Little surprise then that while Yes Bank rose, ICICI Bank dipped marginally on the bourses.

But the results more anticipated are likely to be those from the infrastructure and cyclical arenas. If results from these sectors are encouraging, that would show that the broader economy is gaining critical momentum, which in turn would propel markets in the long run. If infra results are tepid and no signs of a pick-up in order books are visible, markets are likely to be range bound.

In the last few seasons companies have expanded margins. Many of them had posted good profit growth due to the fall in commodity prices. This may not continue if commodity prices rise in coming quarters. So, watch for top-line growth as well. Companies that post decent growth in both revenues and profits are in a sweeter spot since they are proving that they can grow despite the slowing economy.

International markets are stabilising. But, with the Bank of Japan not obliging markets with further stimulus, global markets lost some ground. Markets have gotten used to that kind of stimulus; hence, any news of a cut in stimulus or an increase in rates is likely to impact markets.

Foreign investors continue to believe in the India story, but they did turn marginal net sellers on the last day of the week pulling out Rs 205 crore. Compared to the nearly Rs 24,000 crore pumped in by them, they have bought shares worth just Rs 3,000 crore, suggesting that their buying keenness may be waning.

However, this is not a strong indication that foreign investors have turned sellers, though traders may want to watch the end-of-day buying statistics. Domestic investors are still sitting on the sidelines, but this may be changing. Last week, there were a few days when DIIs turned net buyers.

For now, the markets may find it difficult to cross 26,000 on the Sensex. But since the ground realities continue to be mixed, the markets may continue range bound. Stocks need earnings growth and liquidity to support and extend equity prices. If you are looking at the quality names, this is still a good market. But you will have to be prepared to buy on the downside.