Indian Indices Trade Marginally Lower; Healthcare Stocks Witness Selling

Fri, 12 May 11:30 am

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Share markets in India are presently trading marginally lower. Sectoral indices are trading on a mixed note with stocks in the healthcare sector and banking sector witnessing maximum selling pressure. IT stocks are trading in the green.

The BSE Sensex is trading down 66 points (down 0.2%) and the NSE Nifty is trading down by 29 points (down 0.3%). The BSE Mid Cap index is trading down by 0.5%, while the BSE Small Cap index is trading down by 0.4%. The rupee is trading at 64.31 to the US$.

Most of the volatility seen in the Indian share markets today comes on the back of quarterly result announcements by various companies.

Among the list, Dr Reddy's Laboratories, PNB Housing, UCO Bank, Havells India are some of the companies that are scheduled to report their quarterly earnings today.

One must note that there's much hoopla surrounding the ongoing earnings season. However, if one has to go by the year-on-year performance, there's nothing to cheer much about it.

As an article in Business Standard suggests, the earnings growth has slid from 15.6% in FY16 to just 7.2% in FY17, making it the worst in three years. This is despite the lower tax outgo and other income boost in FY15. Domestic market focused companies too have slowed down due to notebandi.

One must note that the actual performance for the last quarter of FY17 has been much below brokerage estimates.

All of this brings us to the question of how can one make money in a rising market, with little support from earning trends and with brokerages getting it all wrong?

We believe a few super investors could provide the clue. These are the guys who've beaten the markets black and blue and have an eye for multi bagger stocks irrespective of the macro environment.

With respect to which super investors to follow, my colleague Kunal and Rohan have could be of great help courtesy their project, The Superinvestors of India.

To know more about these superinvestors and their stock picking approach, download a free copy of - The Super Investors Of India.

Moving on to the news from global financial markets... Fed Vice-Chairman William Dudley said that the Federal Open Market Committee (FOMC) is on track to reduce its asset purchases this year or the next as the US economy is well on its way to recovery.

Along with that, Boston Fed President Eric Rosengren urged his policymaking colleagues to raise interest rates three more times this year and consider starting to shrink the central bank's balance sheet after their next hike to avoid creating an overheated economy.

In its latest monetary policy meet last week, the Fed kept interest rates unchanged. While doing so, the central bank downplayed weak first-quarter economic growth and emphasized the strength of the US labor market.

The fed signaled that it's still on track for two more interest rate increases this year. As per the central bank, consumer spending has continued to be solid, business investment has firmed and inflation has been running close to its target in the recent months.

An important part in the Fed minutes is that most Fed policymakers think the central bank should take steps to trim its US$ 4.5 trillion balance sheet later this year as long as the economic data holds up.

However, trimming the balance sheet would tighten financial conditions and could affect the pace of rate rises.

Since 2008, the Fed's swelling balance sheet has propped up the US economy. And it has aided the rally in emerging markets all these years. Normalising the balance sheet could have an immediate impact on emerging stock markets.

Speaking of emerging markets, the Sensex is placed as the third most expensive emerging market on a comparative valuations basis. This can be seen in the chart below:

India - The Third Most Expensive Emerging Market

The index is hovering around all-time high and the recent surge has made Indian stock markets expensive at current levels.

The above rally is the result of increase in capital inflows into the emerging markets. However, the important question is: Do the above valuations reflect the real state of the economy?

We don't think so. As Richa stated in one of the editions of The 5 Minute WrapUp..."the current market valuations are not a reflection of reality. With economy struggling on many fronts, the valuations look unsustainable, unless there is an earnings recovery soon."

The above valuations can be justified only if we see a pickup in earnings. Our Sensex 40,000 call is based on the same premise.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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