With the results season now beginning to start in all earnest it is important to see how results have panned out till now and the key takeaways from the same. The most prominent results out till date have been from the Technology and the Banking segment. Technology sector results have been positive in general and the most important thing is the guidance that the companies have given on hiring as well as top line growth for next year. With growth likely to be in the region of 25% for the top tier companies for next year the things are looking good for this sector. However cost pressures are also high, currency movements are a concern and valuations at a 50% premium to market multiples. The other set of results that have come out have been from banking where the banks have reported in line with expectations and the outlook again seems to be positive. The key risks for the future will be increase in NPA’s as interest rates move up and also a likely squeeze in margins with the cost of funds moving up.
The bigger positive from IT sector results that I see is the very strong hiring picture in the sector which is extremely positive for the economy. The addition of nearly half a million people in this sector over the next 12-18 months is likely to boost consumption across the board. It should also be positive for housing demand over the medium term. The other positive that I see from this picture is that the strong growth in IT exports will boost the Forex income of the country and will have a positive impact on the current account deficit going forward. IT sector exports for this year were in the region of USD 60 billion and a 25% growth in USD terms implies a growth of USD 15 billion over the next 12 months which when combined with the general buoyancy in exports seen over the last 12 months should see the Current Account Deficit remain well under control despite the spike in crude oil prices.
The mid cap companies have just started to report and results in general have been pretty strong given the cost pressures and higher interest rates. Given the extreme pessimism surrounding this sector positive results have seen stock prices respond positively. I believe that this is likely to be a key feature of the current results season where in sectors where expectations are running very low any positive surprise will lead to a sharp up move in stock prices. Also where mid cap companies surprise positively we can see a sharp up tick again.
Crude price impact
The biggest talked about issue (specifically in the Indian context) has been the up move in crude prices and its impact on the economy and consumer demand. It is important to see who is impacted by inflation the most and how the inflation of crude prices will impact various economies.
At a price of USD 100 per barrel the total consumption of crude oil in India at a consumption rate of 3 million barrels per day is USD 110 billion per annum. In the current year i.e. April -March 2012
The consumption of oil in the
Now the key is to see that given the economic growth and growth in per capita income which economy will be impacted more due to the spike in crude oil prices. Now if
However all said the excessive speculation in commodities is not presenting a very positive picture for inflation in general. The key is to see when the US Fed will realize that they need to wind down the excessive money printing. They are the last ones left now, off course with the follower BOE, however with
OVERALL MARKET VIEW
The overall market view continuous to be bullish and markets should continue to climb the wall of worry. As per my technical analysis (purely, nothing fundamental) we should see the next major correction in the markets only after a new high and much higher levels over the next few months. With a large number of Asian and other emerging markets already crossing their November/all time highs we should see the Indian markets follow with a lag. There continues to be pessimism in the markets and a lot of money on the sidelines, which I think will come in only after the earlier high gets taken out. As such my base case view at this stage will be that the markets are set for a further rally before any significant correction sets in (defined as more than 5-6%). As I wrote earlier the outlook is better for sectors and stocks where expectations are low and chances of outperforming earnings are higher.
You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right-and that’s the only thing that makes you right.” -Warren Buffett