The current week was a break in the trends in more asset classes than one versus that was on for the last several weeks. Stock Markets, commodities, bonds etc all sold off, some moderately and some aggressively. Cryptocurrency volatility came back strongly and the huge short trade against the US Dollar unwound a bit as the US Dollar Index staged a decent uptick.
I will start of with my take on the Stimulus and then market uptick story. The USA has now delivered and announced nearly 5.2 Trillion worth of Stimulus which is 25% of GDP over the last 9 months. This has been backed up by huge monetary stimulus by the US Federal reserve where the balance sheet has expanded now to nearly $ 7.3 trillion from $ 4 Trillion at the time of the start of the crisis. US Feds balance sheet now amounts to nearly 30% of the GDP of the USA. Stimulus is like steroids, it has a strong impact to start with and lesser and lesser impact as the dosages are repeated. Despite what the US Government has already done we still see huge joblessness, a significant slackening of the economy over the last two months and unclear growth trends for the near future. US Debt to GDP is likely to approach nearly 150% this year from a level of just 80-90% a decade back. This will have a huge negative impact on long term trend growth rate as its essentially borrowing from our children to fund us today. If USA was an economy which could have grown at 5-7% with inflation this ratio could still have come down however for an economy which might just grow 1-3% long term it will create a huge drag.
The results season started strongly with most of the technology companies reporting strong numbers driven by digital demand and cloud adaptation. Profitability was boosted by a huge cutback on Sales and Marketing expenditure as well as keeping employee costs down. Large Technology companies now trade near 30X Price to Earnings ratio with a long term growth outlook of 5-10% not very exciting for me. HDFC Bank reported decent numbers as I write right now but more in line with expectations with no positive surprise. This could create some downside going forward. We should see more results start to come out next week onwards.
The other interesting aspect I wanted to write about this week was how most analysts start off very bullish at the start of the year but earnings eventually turn out to be lower always.
The last few years Nifty EPS and the projection for next year as per consensus estimates is given below
FY 2018 455
FY 2019 470
FY 2020 440
Now the most important part is that for the next year the earnings projections are for a 30% earning growth which is something that has not been achieved anytime over the last 15 years. Although the losses of the first quarter for many companies creates a significantly lower base still 30% is a tall ask as many of the larger companies like Technology, Consumer as well as Reliance might deliver more near 8-15%. So in order to get to 30% growth the rest of the Nifty basket might need to grow earnings at 50% a highly unlikely scenario. Even if we assume that earnings growth will actually be 30% and Nifty EPS at 600 at a level of 15000 Nifty trades at 25X one year forward earnings which is very high.
There are significant input cost pressures that are building up with the rally in commodities and as such even as the economy recovers and sales growth is stronger margins could get squeezed especially in sectors like Automobiles and Consumer Durables. Crude prices have also rallied sharply lately and fuel prices are nearing records in most Indian cities.
Nifty ended the week up by around 0.5% while the Midcap Index ended down by around 1%. Going forward risk reward is not favourable for the market as a whole however there are many companies which are doing better than expectations but still not fancied and are providing investment opportunities. However these might not be the leaders of the last move in the markets or those trading at very high valuations. While domestically there is a lot of cash on the sidelines the flow from ETF’s into Emerging Markets has touched euphoric proportions. Like ETFs don’t look at the price while buying the same is the case on the flip side. Larger market participation needs to wait for better valuations.
“It is difficult to make predictions, particularly about the future.” — Mark Twain