The market had muted expectations from the Q2 results season, which started in October. Despite this, it was not expected to bother the market because the broader market went down by about 7% (Nifty500 index) during the month of September.
The downfall partially digested the disappointments to be caused by the weak corporate earnings from the inflationary economy.
Secondly, the resilient domestic markets got upgraded because of improvements in the US market in October.
Now, the market is close to an all-time high level. The first round of results is mostly from high-calibre companies. About 2/3rd and 1/2nd of Nifty50 and Nifty500 companies have revealed their results, which have been digested by the market.
They had a negative bias but mostly in accordance with the expectations. Since the global market continued to improve and these companies have a strong long-term outlook, it did not affect the domestic market much.
Improvement in FIIs inflows, amid the assumption that inflation in the US has peaked and FED policy will become less hawkish, aided the domestic trend.
However, the upcoming subdued Q2 results by tier 2 & 3 companies can have an implication on the market in the short term. Q2 preview earnings analysis forecasted a flattish earnings quarter for the Nifty50 index.
From that, about 32 results have been announced until the 1st of November, which show that the total earnings are down by -2%, compared to about 7% growth forecasted for these companies.
Now the market expects that the total earnings of Nifty50 will be down by -10% compared to the 0% earnings growth expected a month ago. It indicates that the next set of results will be weaker than anticipated.
A similar harsh outcome is foreseen for the broad market. Forecasts are available for 427 equities out of the 501 stocks in the Nifty500 pack, of which 202 have already released their results.
The results were mostly in-line with expectations, with -5% earnings growth compared to a -4% degrowth estimate.
However, the expectations for the next set of results to be announced are weaker, with a total degrowth of -12%. This will lead to a downgrade in earnings while the market is on an upswing.
The global market was hopeful that FED policy would allude to moderation in the future stance. However, the hawkishness was sustained with a 75bps hike in November. Another hike of a smaller magnitude of 50bps is expected in December.
Some uncertainty can grip the market during November & January as the actual outcome and rate policy of 2023 pans out.
As a result, the domestic market can become volatile in the near term due to both the factors of subdued upcoming Q2 numbers and a volatile global market.
However, we anticipate that this effect would be limited, testing investors’ tolerance in the short term, as India’s medium to long-term outlook remains positive.
We believe that the market is in the latter phase of consolidation. The US market can bounce in the next 3-6 months if it realises that the worst of monetary policy is over.
The sustenance of the rally will depend on the ability of the economy to showcase a more than-forecasted fall in inflation, leading to a fall in interest rates in the future, and reducing recessionary risk.
This could be the best-case scenario, though it is possible in the long-term as supply constraints are removed from the War & Zero-Covid policies.
Hence, we continue to believe that buy-in-dip continues to be the best strategy for Indian equities with a balanced portfolio approach.
First published in The Economic Times