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Investors Must Watch Both Inflows And Earnings Now
Foreign investors have poured in $3 billion, and counting, into Indian equities in March. Domestic investors are, however, not as bullish the foreign investors
If stock markets are showing a magical moment or two, it’s because of one reason – foreign inflows. March has been the best month in over a year. The BSE Sensex clocked 13 per cent gains the last month as foreign investors have been busy lapping up equity. Their total purchases? Rs 19,111.43 crore.
Domestic investors are, however, not as bullish the foreign investors. Their total sales in March have totted up to Rs -6907.90. DIs have been continuous net sellers last month as some equity funds have seen outflows the past month.
Reason? Stocks have been showing a negative return of about -20 percent the past year, and that is probably weighing on investors’ minds. Retail investors tend to be wary when there the markets go through a negative year and slow down their purchases.
Hence, inflows into the market have been mixed. While foreign investors are gung-ho on Indian and emerging markets on an accommodative US Fed interest rate stance, domestic investors are going through a hesitant phase.
Along with inflows, earnings are also crucial. As the year has come to a close, earnings numbers will begin to roll out. A slowing growth is already factored in by the analysts.
Investors are closely scrutinizing the conference calls wherein managements discuss future earnings. March earnings calls are crucial because it sets the tone for the entire fiscal year 2017.
If the tone is sanguine and more businesses are optimistic about the future forecasting better earnings growth, the stock markets will perhaps see some more magic in the coming months.
Some prognostications show that there will be a modest pick-up in business activity, but by and large earnings uptick is not going to come easy. If FY16 has been flat, FY17 earnings growth could be in the mid-range single digit.
For now, all eyes are clearly on the RBI credit policy that is due to be announced this week. The RBI is widely expected to cut interest rates by around 25 basis points as the forex markets are showing signs of stability, and the government has kept the reigns of fiscal deficit in check at 3.5 per cent.
Stocks have priced in a 25 basis points cut. After the big event of the credit policy is over, investors will again shift their lens on the upcoming earnings season.
The sectors that have dragged down the frontline indices in FY16 are commodities and PSU banking. Commodity prices are showing signs of stabilising on the back of a lower base and a small and modest recovery in prices.
PSU banking clean-up is taking place and if the accommodative credit policy scenario plays out as expected, PSU banks could show some treasury gains, and also see an increase in lending activity. These two sectors could then lift FY17 earnings into a higher trajectory.
These are still early days, though. Equity prices and valuations, which had slipped to market’s historical average levels the end of last month, have gone in the above average zone. By that yardstick, stocks are not inexpensive. Stocks are also due for a small correction having gained spectacularly the last month.
For their part, there are two wands investors must watch for if they want to see some more magic in the markets – inflows and earnings. In the short run inflows matter more than earnings; but in the long run, the earnings wand is always the one that creates better magic.