Sentiments have changed, and how. A feel-good factor is enveloping stocks. And among the beneficiaries from this new-found momentum are going to be large-cap stocks. Having been hammered to their 52-week lows and having seen some really deep red cuts in prices the past few months, an uptick now in large-caps will do wonders to the feel-good factor.
It can also have snowballing effect on different segments of the market like mid- and small-cap, or see sectoral revivals, and even increase fund raising, spur corporate expansions that can percolate into the economy. In fact, this feel-good factor has the potential to kick-start the virtuous growth cycle.
This time the feel good factor is coming from overseas investors, and yes, their buying is welcome. So far this month, foreign investors purchased stocks worth nearly $2 billion (Rs 12,677.35 crore), which is the highest in the last two years, showing that they have kept the faith in emerging markets.
The US Fed has postponed rate hikes and has signaled that it is more than willing to give the global economy time to recover by keeping an accommodative monetary policy. The European Central Bank, too, has lowered rates and increased its bond-buying program that is putting more liquidity in the hands of financiers that is sloshing the markets with extra cash.
Foreign investors are going to pour the moolah into the large-cap names as they are larger and more quickly traded. Therefore, large-caps warrant an entry, if foreigners stay on course. But as the post-budget rally has been going on for some time now, keep an eye out for profit-bookers to weigh down large-caps. So, stagger purchases.
Back home, the government cut rates on small savings schemes and the Public Provident Fund showing that it is taking some tough decisions to revive the economy. A rate cut reduces interest income in the hands of savers, but helps borrowers to reduce their interest burden.
Banks compete for the same investor deposits like the small saving schemes, hence a cut in interest rates augurs well for them; it reduces their borrowing costs. If the banks pass on this reduction into the economy soon, companies could once again begin the borrowing cycle to make capital investments.
Another feel-good factor could come if the RBI in its forthcoming credit policy meeting decides to cut the interest rate in the economy by at least 25 basis points. Inflation has been trending lower, and currently CPI inflation for February has come in at 5.18 per cent, lower than January 2016’s 5.4 per cent.
Budget 2016’s fiscal-deficit target of 3.5 per cent and the government’s commitment to adhere to this target provides the RBI with adequate ammunition to trim its lending rates.
The only hitch is an earnings pick-up now. Public-sector banks and commodities companies are expected to drag earnings down, while private banks, select IT companies and the oil & gas sector are likely to perk earnings the fourth quarter. The net effect is earnings are expected likely to come in flat.
But without an earnings growth, a feel-good factor can still drive stock prices higher. The term analysts use to describe this phenomenon in the market is re-rating. So even while the odds of an earnings increase are not that high, prices of stocks can rise higher.
Just about a year ago, the stock market had climbed up to a price-earnings ratio of 23 times earnings - with no earnings growth in sight. And now that it has dipped down to a PE level of 17 times, there is no reason why it cannot climb back up again, with no earnings growth in sight – just purely on sentiment.
Sentiments are indeed a strange thing.
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