Investors look to Q4 earnings

Spurred by the RBI’s surprise pause in interest rate hike with upward revision in growth forecast to 6.5 percent from 6.4 percent, higher-than-expected PMI manufacturing data, record monthly auto sales numbers, good provisional Q4FY23 numbers from banks and NBFCs and positive global cues; the domestic stock markets closed in green for a second consecutive week. BSE Sensex climbed 841 points or 1.4 percent to 59,833, and NSE Nifty rose 239 points or 1.4 percent to 17,599. The broader markets also traded higher with the Nifty Mid-cap and Small-cap indices gaining one per cent and two per cent. On the back of falling US dollar index and appreciation in the Indian rupee against US dollar to 81.84 level; FIIs have net bought over Rs1,600 crore worth shares in addition to Rs2,243 crore worth buying in previous week. For near term, the phase of sustained FII selling appears to be over say observers. All eyes will be on the Q4 earnings as investors mull over management commentary over the visibility of earnings for coming quarters. Though the headline inflation moved above the RBI’s upper tolerance band of 2-6 per cent in January and February; post its policy meeting, RBI Governor said that inflation is likely to moderate in 2023-24, but the fight against it for the central bank is not over yet. International crude oil prices had risen sharply in the week ended after OPEC and allies including Russia pledged voluntary production cuts. It is pertinent to observe that apart from crude oil Gold prices hit fresh 1-year high. China’s military launched exercises around Taiwan have renewed fears of another Ukraine like situation in South China Sea. Political analysts say Beijing has its eye on the island’s presidential elections early next year and could temper its response to help candidates from the opposition Kuomintang, or Nationalist Party, who favour friendlier relations with China. Near-term direction of the markets in yet another holiday-shortened week will be dictated by the Q4 earnings, inflation data, FOMC minutes and other global cues. On account of Dr Baba Saheb Ambedkar Jayanti, coming Friday will be a trading holiday.

Listening Post: A Golden Rule from a Golden Fool. The yellow metal has been white hot this year. But those who rush to buy it could still end up in the red. Gold has risen nearly 90 per cent in last six years, hitting an all-time high this week. The yellow metal didn’t sit inert. Gold has returned an average of 10.5 per cent annually—barely below the gains on stocks. Gold’s returns in rupee terms over the past 15, 20 and 25 years are 11.6%, 12.4% and 9.4% CAGR, respectively. And so far in 2023, it’s up from Rs 54,790 per 10 grams to Rs.62,820 per 10 grams even as stocks are as flat for the year. The 10 Best Gold ETFs in the country have averaged 5 year returns of around 13% per year.

Even so, traders and investors who are perennial fans of the yellow metal have a flaw in their thinking, too. They always believe gold is cheap, no matter what, even though they seldom have the same reasons for believing that it’s cheap. That is its own sort of mistake. Gold is attracting a lot of money in a hurry. For us to be able to understand gold investing, we first have to understand what moves gold prices. For all practical purposes, it’s the negative real rate that moves gold. When inflation is higher than the prevailing interest rates, you have a negative real rate environment. If rates start to go up or inflation starts falling; it can be theoretically negative for gold prices. Gold is mainly used as a store of value, to preserve wealth that erodes over time due to inflation and as a hedge against currency movements. Gold has always been a preferred investment option in India and though prices are determined less by demand supply of the actual metal and more by two factors – gold prices globally and currency movement of Rupee Vs USD. Investing in gold caught attention as it zoomed over 50 per cent amidst pandemic. Such hot money isn’t always sparked by the same thinking. Depending on what worked at the time, gold has been regarded as a buffer against high inflation, protection against a falling dollar or a universal currency that shines brightest when the news is darkest. Adjusted for inflation, gold would still have to rise approximately 52 per cent from this week’s prices to match its level of January 1980.

Low rates have fuelled high returns for gold. So, the yellow metal, once considered a hedge against an overheated economy, has become a bet against a return to economic growth. That’s not a sure thing. The main downside risk to gold is the variations in interest rates. A surprisingly swift or unexpectedly strong economic recovery could push interest rates back up, hurting gold. Another risk: The hot money that has poured in lately might turn out to be even more fickle than the precious metal itself. Just ask anybody who bought gold as recently as in 2012 around Rs31,050, when speculators lined up on city sidewalks to get their hands on the stuff. By the end of 2018 also it was languishing at Rs31,438. There’s nothing wrong with keeping a few percentage points of your portfolio in gold. That’s especially true if you build that position over time and hold it as lifelong insurance against a collapse in the rupee or as a long-term hedge against low interest rates. Then, even if gold reverts to being a pet rock, you shouldn’t regret holding it; after all, the purpose of insurance isn’t to obtain high returns, but to protect against risks. If, however, you’re buying gold by the fistful now that it’s surged in price and popularity, then you run a substantial risk of ending up being as wrong. Gold has long periods of stagnation and short bursts of price rise. Gold as an investment should have an entry and exit strategy.

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 renewed optimism in the underlying cash market and unexpected interest rate pause by RBI; the derivatives segment witnessed robust volumes. Nifty and Bank Nifty both the indices ended the week with gains of more than one per cent and are trading well above their rollover levels. Multiple holidays during the course of week were not a deterrent for bulls. The maximum Call Open Interest was seen at 17,600 strike followed by 17,700 and 17,800 strikes; whereas the maximum Put Open Interest was seen at 17,500 strike, followed by 17,600 strike, and 17,000 strike.

The Implied Volatility (IV) of Calls closed at 11.09 per cent, while that for Put options closed at 12.35 per cent. The Nifty VIX for the week closed at 12.41 per cent. PCR of OI for the week closed at 1.23 higher than the previous week indicates more Put writing than Call. Technically both the indices are trading above its 200-Exponential Moving Average on daily interval, and also above its short-term 50 period Exponential Moving Average. Nifty may find strong resistance around 17,600-17,800 area, whereas 17,500 is expected to be near-term support followed by crucial support at 17,200 level.

Adopt ‘Buy on Dips’ strategy advice market players. Following a 25 per cent hike in securities transaction tax (STT) on sale of options as well as futures by 25 per cent each from this month, only five per cent of F&O traders are likely to make money say experienced traders. Avoid Overtrading. Q4 earnings will be kicked off by index heavyweights Infosys on April 13, Tata Consultancy Services on April 12, and HDFC Bank on April 15. Growth in quarterly earnings is likely to be driven by the banking and financial services, and auto sectors, while metals and mining may be hit significantly by a fall in commodities and low realisation. Growth in net income as well as revenue may be in double digits. After the recent banking crises in US and Europe, FIIs were seen selling IT stocks on fears of several global banks may re-prioritise tech spending. Fund managers expect sequential growth of IT companies getting hit by 1-2 per cent in Q1FY24. IT majors may report lacklustre revenue growth in Q4FY23. Follow the commentary of IT majors over near term outlook of the sector say industry observers. Stock futures looking good are Bajaj Finance, DLF, HDFC, Sun Pharma and TVS Motors and Ultratech. Stock futures looking weak are Apollo Hospitals, Balakrishna Inds, Deepak Nitrate, Gujarat Gas, Persistent Systems and UBL.

-The author is a senior maket analyst and former vice- chairman, Andhra Pradesh State Planning Board