Stock markets are heading into this week with a rip-roaring up move. The Nifty 7.8% gains this past month has kept the bellwether topping the 11000-mark leaving early birds with sizeable gains on the table. But as good it goes, this exuberance should be making investors nervy.
Some of the better Q1 figures are not because growth is booming but because analysts lowered the bar and slashed forecasts. In addition, corporates initiated several cost control measures in the last quarter including wage cuts. Further, input costs for corporates have been benign. So, the Q1 figures are ok to shore short-term sentiment. But in the long-run, spending-led growth has to spur stocks going forward.
In addition, the fear of missing out is another driver for new retail investors entering stocks. Retailers account for about 57% of the average daily turnover now compared to about 50% three months ago. A large number of retailers are entering through direct participation and do-it-yourself investing through discount brokers.
Much of this is investing is led by hearsay and not fundamentals or outlook. Trouble is, investors are assuming that stocks are only going to go up. For now, of course, liquidity is the driving force for the markets. But markets are also cyclical in nature mimicking the ups and downs in the economy. Investors will need to watch their ride in the coming months.
Then there’s index heavyweight Reliance Industries that accounts for a bulk of the market’s rise since March. The stock has been on sprint on the bourses and scaled new highs last week. Investors have seen their stock value more than double since March. The spotlight this week too will be on Reliance Industries Ltd, which is slated to declare its first-quarter results.
Speaking of first-quarter numbers, Larsen and Toubro’s consolidated numbers showed a lower decline of 69% year on year (y-o-y).
Bajaj Auto Ltd’s the y-o-y revenue dropped 60% drop as sales volume dropping 64%. The management’s post-pandemic optimistic outlook, however, kept the momentum going.
For companies like Hindustan Lever, while the outlook is improving, investors are pricing earnings far into the future.
Hindustan Zinc’s results were weak given the lower commodity prices. But once again the outlook is driving hopes that the stock could revive, particularly led by the pickup in silver.
Even though corporate earnings so far indicate that India Inc has navigated a rough June quarter, the Reserve Bank of India’s stress test confirmed a hit on banks.
It should have been a better quarter for insurance companies. But the value of the new business was down as the lockdown crimped sales and collections.
Jindal Steel and Power tided over Q1’s slowdown with better export growth, and cost controls.
Even so, the commodity markets are in the news for another reason. Safe-haven gold has started to run up in international markets. Silver has also run-up. In global markets, silver jumped to almost $23 an ounce, the highest in seven years. Commodity analysts expect this rally to continue given the uncertain on global demand recovery and continued stimulus by central banks.
Global investors will be clued on to the Fed’s upcoming meeting this week. The Federal Fund rate is likely to be kept at zero. Besides, second-quarter US GDP numbers will be out this week. A huge contraction is expected in the world’s largest economy. Consensus estimate a 34% contraction.
But investors will be focusing on how quickly the US economy could rebound. A rising number of coronavirus cases bodes ill and further crimps consumer confidence. Further, unemployment benefits are ending soon, and signal tougher times ahead. As such, a spending increase will be needed to shore up the US economy.
That said, India’s fiscal numbers will also be announced this week. Government spends have increased and taxes and duty revenues will be lower. This will naturally elevate the fiscal deficit.
While most of the bad news is factored in, however, the pandemic has also exposed the fact that some companies will be more badly hit. Consumption growth could be slower in rebounding, particularly for discretionary products as income levels slack. Right now, history suggests the gap between the markets and the economy is wider than ever. Investors may be better off not overlooking this fact.