Decoding the dislocation between economy and stock market

Smart money always stays ahead of the times.

What is smart money? In financial parlance, smart money is the capital deployed by well-informed institutional and professional investors into markets. Usually, it is smart money that sets the trends and other investors follow their moves.

So, what are they betting on?

To make more sense of their actions, we analyzed Q1FY21 results of Nifty 500 companies. After all, everybody’s concerned about a divergence between the economic outlook and the stock market performance.

396 companies (out of 500) have declared Q1 results so far and depending on your lenses—bullish or bearish—you may find them exciting or insipid. We took January 17 and March 24 as the reference points to measure the pre-pandemic and during pandemic performance of these stocks, since the broader markets made YTD highs and lows on the on these days respectively. As many as 387 companies traded above their March 24 levels but 130 of them were still available at a discount to their January 17 levels.

Not so surprisingly, companies in the consumer durables, leisure, hospitality, automobiles, construction, real estate, retailing and logistics, among others, have witnessed 30% to 94% fall in their revenue and PAT. Green patches can be found in the technology, pharmaceuticals, chemicals and consumer non-discretionary goods sectors.

Observations

• Despite reporting fairly healthy numbers in Q1FY21, the bulls seem to have quarantined Banking and Non-Banking Financial Companies (NBFCs)—perhaps citing the potential rise in the Non-Performing Assets (NPAs).
• Despite reporting stable numbers, the stock market performance of FMCG companies has been average. But its noteworthy that they were the fastest to recover, early in pandemic times; so is the case with some pharmaceutical companies, such as Abbott India. Now investors seem to have shifted their focus on mid-sized pharma companies instead, which have demonstrated strong financial performance and have a high growth potential—Caplin Point Laboratories, for instance.
• The stock price strength of a few companies such as Mahanagar Gas is understandable, given the nature of their business and prospect post lockdowns. But the uncanny resilience of that of commercial vehicles and passenger vehicles manufacturers is startling. Especially considering the gloomy picture they stared at even in pre-COVID times.
• Smart money seems to have decided to ride the Atma Nirbhar Amber Enterprises—one of India’s most prominent contract AC manufacturers has already surpassed its pre-COVID level. A similar trend has been observed in the defence sector as well.
• What’s more intriguing is stocks of consumer financiers are available way below their pre-pandemic prices. Does that mean, consumers will take fresh loans to buy cars and new air-conditions? And while banks face a lot of stress, will they still lend?
• Within the technology space, not all companies have received the same attention of investors. For instance, Affle—a mobile marketing platform, Indiamart—a B2B and B2C e-commerce platform have not only reported impressive results but have gained immense popularity amongst investors. Unlike those in the FMCG sector, high-valuations haven’t been a concern for investors—perhaps due to growth expectations. On the other hand, companies such as Sonata Software and Tata ELXSI have lagged in the race.

Conclusion

Banking, conventional engineering companies and some state-owned names appear cheap. However, there are quite a few contingencies associated with them—be it the possibility of higher NPAs, potential economic slowdown or slow progress on the improvement in corporate governance.

Smart money perhaps has created a blueprint of how the world may look like post pandemic. Its next step depends on the future progress of the economy and pace of growth in corporate earnings over the coming quarters.

You may also like to read: Stock market tour: from trouble zone to bubble zone

Disclaimer

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.