Mkts factoring in earnings growth momentum

Under the shadow of RBI Policy decision on interest rates and global cues, the domestic markets took a breather during the week ended. After briefly scaling past the 18,700 mark, NSE Nifty settled only 0.16 percent higher at 18,563 points and BSE Sensex gained 0.13 percent to end at 62,625 points. However, the broader markets were a bit exuberant and buoyant with Nifty Mid-cap gaining 0.5 percent to end the week at 34,153 and the Nifty Small-cap gaining 1.17 percent. In fact, Nifty Mid-cap touched a new high of 34,534.70 points. Since April 2023, Nifty delivered returns in excess of 4.1 per cent and even more remarkably mid and small-caps have outperformed quite significantly. Unlike the last rally in 2022, the ongoing rally seems to be led by a wide variety of sectors and not just the banks. Auto, consumer and real estate have all delivered strong double-digit returns. This shows that markets have now started looking ahead and have already started factoring in the strong earnings growth momentum expected in these sectors in the coming months. This is a classic sign of the return of the bull market. While keeping the policy rate unchanged, the RBI remained cautious on inflationary risks going forward and was sufficiently hawkish — reiterating the need to keep monetary conditions tight to anchor inflation at four per cent through the year. The commentary on growth was upbeat as expected with the RBI keeping its projection unchanged at 6.5 per cent for FY24. The central bank could keep rates unchanged through the year with the chance of any rate cuts in FY24 seeming slim in current year. The risk-free rate (10-year GoI bond yield) has fallen below seven per cent for the first time in many months. This is a strong signal that markets now expect RBI to cut policy rates by ~50bps in the current calendar year. The US Federal Reserve is expected to not raise interest rates for the first time in well over a year at its June 13-14 meeting possibly to assess the impact of a historically aggressive 500 basis points worth of tightening, having raised rates at every meeting since March of 2022. In domestic context, apart from CPI data, wholesale price index (WPI) inflation for the month of May is scheduled to be released on June 13. In April, the WPI witnessed its first deflation since 2022 as it stood at a negative 0.92 percent owing to a drop in manufacturing, mainly basic metals. In May, WPI is expected to contract 2.2 per cent. The most important factor determining the trajectory of inflation, going forward, will be the monsoon. If the monsoon is normal, food inflation will remain under control and this will give room to RBI to go for a rate cut. Therefore, the progress of the monsoon should be keenly watched. Though another round of profit booking in upcoming sessions is not ruled out, the bias still remains in favour of bulls and old timers advise investors and traders to use these dips to create fresh longs.

Listening Post: A Checklist for Investors

Here’s one of the most reliable ways to improve the quality of your portfolio. With the benchmark indices close to historic highs this year, many investors might already be struggling to avoid getting greedy and making careless mistakes. By building a checklist—a standardized set of questions you must answer before you commit to any investment decision—you can reduce the risk of making costly errors. The best way to do that is by looking at your past mistakes. That’s true no matter how you invest, even if you don’t buy individual stocks at all. The idea, still surprisingly underused in the investment business, is adapted from hospitals and the airline industry. An itemized list of procedures and how to follow them, can hold the odds of doing harm low enough for the odds of doing good to prevail.

Checklists help fix one of the biggest flaws in the way investors make decisions: inconsistency. How much you pay for a stock matters. But so do the quality of the company’s management, how much debt it has, who its customers and competitors are, how easily it can raise prices, and many other variables. So which factors should you emphasize the most? Many investors, including professional money managers, just go with what feels right at the time. Humans are incorrigibly inconsistent in making summary judgments of complex information. Decades’ worth of psychological studies show that people are extremely good at figuring out which information they need for a decision—but do a poor job of using that evidence methodically over time. You are likely to draw divergent conclusions from identical data on different occasions, even when nothing fundamental has changed, because of variations in context, alterations in your mood, shifting demands on your attention and memory, and so forth. No wonder many investors have tendency to make “the same type of mistake again and again.”

To combat this tendency, it is important to have a checklist. Structuring your decisions this way, forces you to take a holistic view of a stock or other asset. That should reduce your odds of being flummoxed by the unexpected.

Remember when we look to make an investment, the greed part of the brain is turned on. A checklist is like a circuit breaker that helps prevent the brain from being able to flip that switch. Build a customized checklist based on your own history of your own failures. Review your past decisions that lost money. Avoiding the mistakes you've made in the past will take your error rate way down in the future. The blunders made by great investors fall into five groups: valuation, or how cheap an investment is; leverage or risks associated with borrowing; management and ownership; moats, or how well-fortified business are against competition; and personal biases.

Do research and consider the questions like: How good is management at allocating capital? Is cash flow overstated because of an unsustainable recent boom? Does the company appeal to me because of personal preferences that might be clouding my judgment? Your list, of course, should include only questions you know how to answer; they need only be relevant to your past mistakes and to your current and prospective investments. Look at the places where you've made mistakes and where you can understand the mistakes of others. Use that to understand where you don't want to go in your own investing world. Ponder what you should have asked to avoid those problems to begin with. Those are the questions to add to your checklist.

Quote of the week: It’s not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong

— George Soros

Too many investors become obsessed with being right, even when the gains are small. Winning big and cutting your losses when you're wrong are more important than being right.

F&O/ SECTOR WATCH

Mirroring the consolidation in cash segment, the derivatives segment witnessed brisk action in selective stock futures. As per the weekly Options data, the 18,700 strike has the maximum Call Open Interest, followed by 18,800 and 18,600 strikes. On the Put side, the maximum OI is at 18,700 strike, followed by 18,600 and 18,300 strikes. The Implied Volatility (IV) of Calls closed at 9.49 per cent, while that for Put options closed at 10.57 per cent. The Nifty VIX for the week closed at 11.26 per cent. The PCR of OI for the week closed at 1.36. Overall option data clearly indicates that 18,600-18,800 is expected to remain key resistance area; whereas the Nifty may find support at 18,500-18,300 zone. Expect that market may witness sector rotation in upcoming sessions, as stock specific action likely to remain on radar. Auto stocks were in focus after reporting better-than expected sales numbers for May. Use declines to buy Maruti, Tata Motors and M&M. Rural and agri-related stocks are likely to be in focus with the arrival of monsoon in India. Stock futures looking good are Ashok Leyland, Bharat Forge, BHEL, HUL, Havells, JSW Steel, SAIL and NTPC. Stock futures are looking weak are Chambal Fertilizers, Infosys, GNFC, Persistent, IEX and Navin Fluoro.

-The author is a senior maket

analyst and former vice- chairman, Andhra Pradesh State

Planning Board