Q3 earnings to set the tone for markets

Spooked by the US Fed minutes indicating that the aggressive stance by Fed officials is likely to continue, weak rupee, continued selling from FIIs and weak global cues; the domestic stock markets ended the first week of 2023 on a negative note. After a rallying in the first two sessions of the New Year, the market came under pressure in the last three sessions and selling was witnessed across key sectors like banking & financial services, and technology. BSE Sensex lost 940.37 points or 1.54 percent to settle at 59,900.37 and NSE Nifty fell 245.85 points or 1.35 percent to close at 17,859.45 levels. BSE Mid-cap and Small-cap indices lost 0.58 percent and 0.5 percent.

Among sectoral indices on the NSE, Nifty IT and Media declined 2.3 percent each. Nifty Bank index lost nearly two percent and Nifty Realty index fell 1.4 percent. It is pertinent to observe that the Nifty has now lost over 1,000 points or 5.5 per cent since its record high of 18,887.60 points on December 1, in a little more than a month's time. FIIs remained sellers throughout the first week of 2023 and have net sold more than Rs7,800 crore worth shares during the week.Net buying by DIIs was around Rs2,700 crore. Market players feel that unless and until FIIs flow return strongly, the stellar rally in equity markets is unlikely to be seen though DIIs have supported markets to major extent. For the week, Indian rupee ended flat at 82.72 per dollar. Global economy watchers feel that fears of China's reopening will lift inflation in China and spill over to other parts of Asia are unfounded and that inflationary effects would be rather muted.

On a year-on-year basis, global commodity prices are in negative territory and a significant disinflationary impulse is looming. Inflation is likely to return to their respective central banks' comfort zone in 90 per cent of the economies in Asia by mid-2023. Winning the inflation battle means domestic demand will be protected, allowing growth to outperform. Near-term direction of the market will be dictated by Q3 earnings season, macroeconomic data and Union Budget expectations. On the back of earnings season, expect stock-specific action with sharp moves. Globally, the phenomenon of good economic news becoming bad news for markets might continue in the near term.

IPO Corner:Sah Polymers, the customised bulk packaging solutions provider to several industries, is set to make its grand debut on the bourses next week on Thursday. The Rs66 crore IPO of the Udaipur-based company which sells PP fabric-related products was subscribed over 17 times last week.In the grey market, its IPO shares are available with moderate premium of 4-8 percent over its expected final issue price of Rs65. The recent correction and volatility in equity markets as well as disappointed listings of recent IPOs might have impacted the grey market premium.Driving stock-specific action would be the expiry of shareholder lock-ins in recent debutant Electronics Mart whose 3.3 per cent equity would be unlocked for trading on Jan 10.

Listening Post: The path to profits in growth stocks has dimmed. Soaring interest rates have sent investors to the comforts of value. High interest rates aren't about to vanish. Multiples for growth stocks fall as rates rise, partly because they make risk free returns more attractive in Treasuries and other assets. Nowhere does that sting more than in shares of companies expected to generate earnings far in the future. Recent selloff has made valuations more palatable, and plenty of companies are lifting earnings above the market average. With the macro climate and market shifting, so too should investors. Stick with higher-quality companies and their stocks, while avoiding the morespeculative, unprofitable names. Core ingredients of quality include sturdy balance sheets, positive cash flows from operations, and a healthy outlook for revenue. Investors are sharply penalizing stocks for even the slightest miss to profit forecasts. But high multiples shouldn't be a deal breaker; some companies can justify high valuations with similarly strong earnings rates, measured by price/ earnings-to-growth, or PEG, ratios. Companies without those attributes are in a bind; if they're unprofitable and can't fund their operations or growth organically, they may need to tap the capital markets for financing. That has become costlier amid steeper rates. Investors are demanding higher returns on debt and equity. That will remain a risk to companies having trouble moving toward profitability. There is a need to cast a wider net to find the true quality growth stocks of the next decade. Look for businesses with high barriers to competition and financial productivity. Companies that are capital light, meaning they don't need much external financing or plan large capital expenditure. Companies generating cash flows in the mid teen percentages on their capital investments.

Quote of the week: "The individual investor should act consistently as an investor and not as a speculator."

— Ben Graham

You are an investor, not someone who can predict the future. Base your decisions on real facts and analysis rather than risky, speculative forecasts.

F&O / SECTOR WATCH

On the back of weak sentiment in cash market, derivatives segment witnessed heavy sell off in the week gone by. Maximum Call Open Interest at 18,000 strike followed by 19,000 strike, and 18,100-18,200 strikes. Maximum Put Open Interest was seen at 18,000 strike, followed by 17,500 strike. Hefty Call writing was observed at 18000 strike, while Put writers remained on the back foot with marginal Open Interest seen at 17800 strike. The Option data indicated that the 18,000 is expected to be crucial near term resistance for the Nifty, whereas 17,500 is likely to support area. The overall expected trading range for the Nifty50 would be 17,600-18,200 in coming sessions. Implied Volatility (IV) of Calls closed at 13.39 per cent, while that for Put options closed at 14.38 per cent. The Nifty VIX for the week closed at 14.98 per cent. PCR of OI for the week closed at 1.29.

Weekend rally in US market may trigger relief rally at the start of coming week. Traders are advised to remain cautious as markets are expected to remain highly volatile in the upcoming week. The earnings season for IT majors kicks off with TCS on January 9, followed by Infosys and HCLTech on January 12 and Wipro on January 13.Analysts expect growth to be impacted by seasonal factors as well as macro indicators. Expect muted revenue growth of 0-3 per cent for tier-1 companies. Weakness is expected to be accentuated by company-specific disappointments due to higher furloughs, primarily in the BFSI and hi-tech sectors. Margins are expected to expand 20-100 bps, sequentially, for tier-1 companies, and 20-50 bps for tier-2 companies. Market players do not expect any positive surprises. Stock Futures looking good are Balakrishna Inds, GNFC, HPCL, ICICIGI, MRF, Ramco Cements and Zydus Life. Stock Futures looking weak areBiocon, Birla Soft, Godrej Consumer, Granules, HDFC AMC and ICICI Bank.