Global equity markets continued to generate positive returns for the quarter as vaccination pace accelerated in most developed economies. Additionally, governments of most developed countries continued to ease COVID related mobility restrictions and activity levels picked up. This has resulted in global trade volumes showing a V-shaped bounce back and stimulus measures resulting in improved purchasing power for consumers with consumer spending already exceeding pre-COVID levels in USA.
The key risk to global growth recovery could emanate from potential re-acceleration in COVID cases leading to disruptions in coming quarters. Also, US Federal Reserve indicated that interest rate hikes could be sooner than expected due to rising inflation.
RBI in its latest reports stated that “The tapering of 2nd COVID wave along with aggressive vaccination push have brightened the near-term growth prospects for the Indian economy and GDP growth for Q1’22 was estimated at 22.7%”.
India stock markets marched to new lifetime highs with the benchmark crossing 16000 mark in 1st week of August. The rally was driven by strong positive inflows, good earnings season and positive developments on the vaccine front alongwith steady decline in cases which boosted confidence in economic recovery.
Resumption in economic activities in July post relaxation in restrictions along with strong pent-up demand are positives and guide for strong Q2’22. This along with conducive RBI policy backed by continuation of accommodative stance by the monetary policy committee and their commitment to prioritize growth despite inflationary pressures should aid faster growth recovery.
Companies posted stellar growth in revenues and profit in Q1’22 on Y-o-Y basis due to low base of last year which was marred by stringent lockdown amid 1st wave of pandemic but margins were under pressure due to rising input costs. However, a Q-o-Q comparison of 2328 sample companies reveals some impact of 2nd wave with sales dropping by 8.4% while net profit fell by 10.7% after rising sequentially for 4 previous quarters.
On the sectoral front, it was a mixed bag with IT, building materials including cement, metals, domestic focused pharma companies, Fertilizer, Textiles, FMCG and Oil & Gas companies outperformed whereas auto & auto ancillary, Banks & NBFC, Chemicals, Capital Goods & Infra companies underperformed.
Current Nifty PE is 27x vs a historic high of 42x around February 2021. Why this sudden drop? Ans is EPS Growth; Nifty managed to deliver decade high earnings growth in FY21. So even though optically benchmark’s PE looks expensive but as earnings growth picks up in FY22 & FY23, valuations will again moderate. Investors must therefore not wait for correction and focus their energies on companies on the cusp of multi-year growth and invest with 3-5 year horizon.
While the above statement is true, what one also needs to see is that the on ground facts point to euphoria as over the last couple of months weak fundamental stocks (widely known as Penny Stocks) have delivered significantly better returns vs fundamentally strong companies and retail investors own almost 70% of its free float whereas promoters have sold over 20000 Cr in such stocks. These are signals to keep a safe distance from securities where valuations have moved ahead of fundamentals and best time to exit from such stocks.
We at Care PMS are applying a 2 pronged strategy whereby we are booking profits in stocks which have become little expensive due to steep run up in share price thereby generating cash and at the same time adding new stocks in 2-3 slots thereby giving us room to buy in case of a correction where we have strong conviction and feel risk reward ratio is favorable.
We would like to end the update with the following quote:
“More people have lost money waiting for corrections and anticipating corrections than in the actual corrections” – Peter Lynch
