The extremism seems to be on the rise globally. And it hasn’t spared stock markets as well.
In August, the advance-decline ratio of stocks listed on NSE touched an 11-year high. For every 100 declining stocks, 180 stocks rose. Will you call this complacency, ignorance or confidence? Well, advance decline ratio won’t tell you anything in isolation, hence first we need to understand the context.
(Source: NSE)
Whenever market breadth has touched such extremes the following few months have seen a reversal of established price trends. In December 2007, 160 stocks had risen for every 100 falling and in May 2009, 180 stocks generated positive returns against another 100 rendering negative returns.
Fast forward to 2020, from extreme pessimism in March, markets recoiled sharply, marked by the net monthly FPI investments of a mammoth Rs 47,000 crore in August. Retail participation increased noticeably during pandemic.
But that looks like history now.
The new developments on the global landscape can shape up too fast and furiously in the coming weeks. Factors such as the outcome of the US presidential election, second-waves of infections, pandemic fatigue and uncertain business environment owing to fragile recovery in demand, amongst others, could completely transform the fate of risk-on trades.
Monthly chart of Nifty 50 shows that the 10-Month Moving Average (MMA) is below 30-MMA. Despite broad-based market participation, the index has struggled to touch its January 2020 highs. Are markets also experiencing pandemic fatigue?
Whether or not the market rally will fizzle out going forward is anybody’s guess. And there’s no point doing any guess work. While there can be endless discussions on macro economic factors, politics and policy decisions, markets like to see nothing more than companies beating their expectations.
Instead, it’s crucial to shortlist companies that are reporting higher profit growth, generating attractive RoE and have achieved adequate scale in their business. Companies that can do well in all formats—T20, one-days and test matches, might have a better chance of beating market expectations.
On this backdrop, we analyzed Q2FY21 results to understand dislocations in corporate profits.
Companies from technology, pharmaceuticals and financial services sectors have dominated the result season so far. Interestingly, within the financial services, non-lenders, i.e. insurance and broking companies, have stood out. Select infrastructure plays such as cement have done well too.
TTM: Trailing Twelve Months
Data as on October 30, 2020 (The list doesn’t include companies that reported their numbers post market hours)
(Source: ACE Equity)
You see, barely 8% of companies that announced their Q2FY21 performance so far could pass some rudimentary stock selection criteria. Growth seems to be really hard to come by and only a handful of companies are managing to run the show with a deft touch. Lockdowns dented the Q1FY21 performance of a number of companies and lower RoE on TTM basis is chiefly a function of the washout quarter.
Trends in profits and return ratios would require a microscopic assessment, going forward.
(Source: ACE Equity)
When stock prices reflect an expectation build up and companies fail to deliver on the anticipated lines, markets tend to get edgy. If the sentiment is lopsided, like it appears at present, markets just need an excuse to take corrective action.
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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.
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