Has the introduction of the quarterly season altered the profile of returns generated by the market? By this we mean, is the earnings season as critical as it is in the US for stock market returns? While a powerful lobby took up a very public stance last year in the US (signatories included Blackrock’s Larry Fink and JP Morgan’s Jamie Dimon) on the perils for company managements becoming prisoners of quarterly estimates and not taking a long-term view on boosting shareholder value. Last week, US President posted on Twitter, asking US capital market regulator Securities and Exchange Commission to “look into scrapping quarterly reporting, and the possibility of results every six months.

Yet it would be a gainful exercise to analyse equity returns over a long period of time (at the index level) and find out which factors have influenced this trajectory of returns the most. Data on Nifty quarterly numbers is available on Bloomberg from January 2000 onwards, hence that becomes the starting point of our analysis, ending in July 2018.

First a few clarifications. Earnings season being the period starting on the 5th of the month after the end of each quarter and extending till 15th of the next month, for earnings ending 30 June, it would start from 5 July and end on 15 August. The post-earnings season being the period starting from the mid point of the quarter till 10 days before the end of the quarter, in the above example, it will be from 15 August to 20 September. The third period we chose was the pre-earnings season period, starting 10 days before the end of the quarter till the fifth day after the end of the quarter; again, in the same example, this would be 20 June till 4 July.

These three periods were used to calculate the returns of Nifty as well as S&P 500 from 1 January 2000 to July 2018. See graph for the returns of each of these periods.

It is evident from the graph that the US markets are driven by earnings and post-earnings season, as the key drivers of the S &P 500 returns. In India, the story appears to be different, as the tagline said in the classic Maggi sauce advertisement of the ‘90s: “Boss, it’s different". Pre-earnings season contributes a huge 76% of the returns generated by the Nifty as compared to a paltry 19% of the S&P 500. The results of such an analysis for the last 10 years and the last 5 year comes up with similar results. On the last 5 years basis, the proportion of returns from pre- earnings season actually goes up to 80%, indicating an even greater contribution in an upward trending market. In the US, on the other hand, the time periods do not alter results on either the last 10 years or the last 5 years.

Analysing these results can throw up a cornucopia of answers, but as per our understanding, the following reasons stand out. First, the general optimism post 1991 reforms as well as a swell in economic growth over the last two decades (notwithstanding, the great financial crisis of 2008-09) is best reflected in corporate India’s march to profitability. There has been a huge jump in profits of Indian companies in the last 18 years. The aggregate profit of BSE 100 companies for the year ending March 2000 was 27,900 crore; this jumped to 3.44 trillion in March 2018. The aggregate profit of the top 10 companies of BSE 100 in March 2018 was 1.76 trillion, which was 633% more than the aggregate profit of all 100 companies of BSE 100 companies in March 2000.

Confidence, as we know, is the elixir of optimism. To underline this, Indians have usually been surveyed as being among the most optimistic on their economic outlook in most global surveys regularly over the last two decades. To put it simply, given the quantum jump in the profitability of companies over the last 18 years, corporates are generally more confident and have given more optimistic outlook than their US peers would have. Third, managements in India are usually also owner-led, thus unlike the US, they do not have to keep a “scorecard" of beating the estimate to win over a board/prospective shareholders to ensure their long-term survival. Hence, there’s a “tendency" to be more optimistic of the future, as such overt displays of optimism will not lead to a board revolt for changing the management. No company’s board has replaced managements in a promoter-owned business even when the management has underperformed.

Finally, an issue which, hopefully, with stricter regulation keeps getting plugged (in fact, no stock market can be devoid of it) is the porosity of governance, a pipe where the flow of information can be reduced but never runs dry. “Khabar", it appears, can be an important source of the alpha generation. Given the index movement in the US, the criticality of earnings season is clearly visible. In the Indian context, the pre-earnings season trend is probably a trailer, which signifies how the script will play out. So next time, watch out on the pre-earnings season “trailer" to get a glimpse of the movie before it plays out.

Anoop Bhaskar is head equities, fund management and Viraj Kulkarni is senior manager, fund management, at IDFC Asset Management Co. Ltd

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