Earnings momentum starting to slow down; margins may falter in Q4 & Q1: Pankaj Tibrewal

After a very short phase of a correction, several PSU bank stocks were the top gainers in Tuesday's trading session. Today on Wednesday they are trading with minor cuts and some of them have seen intraday recovery. This is worth noting for two reasons. First, all PSU banks are sitting with a decent amount of gains for the last five months, and even then they have not witnessed a sharp decline. Second, on Tuesday, the breadth of the market was weak. Suddenly PSU turns into an outperforming set of stocks. It signals a couple of things. First, because the banking sector is probably the best proxy play to the Indian economy. It appears the view on the street is positive on economic growth. Second, rather than taking exposure to an individual sector, taking exposure to PSU banks which are still among the lot that are available at relatively cheaper valuations is a trade on the street. But should one ignore the private banks? Probably not. They have their trajectory and just because they have not performed on the street it does not mean their core business model has some issues.. It's just another phase that shall pass.

Private banks lost to PSBs in 2024 as the latter gave double-digit returns. HDFC Bank saw a correction in share prices, FIIs sold financial stocks, and Goldman Sachs issued a “sell” call on YES Bank. PSU banks rallied, but caution is advised in the sector.

Kotak AMC's CIO Equity, Harsha Upadhyaya, highlights the growth potential of banking, industrials, autos, and cement sectors in the Indian economy. Banking is set to have significantly higher earnings growth over the next two years as compared to the broader market. However, Upadhyaya does not see the auto sector continuing its rally due to lower-than-expected volume growth. Instead, the growing demand in the capital goods industrial segment, driven by overall investments from the public and private sector, may be a preferred area of opportunity to outperform the market.

While it might be too early to call or to some it might appear to be wish of which bears on the street would have, but the way the market breadth has panned out, there is probability of a selective correction taking place, which is essentially led by the profit booking. At this time if one is looking to increase exposure, it would be better that they should look for stocks where there are some improvements in the business operating matrix that tend to weather the storm better. These selected stocks depict a strong upward trajectory in their overall average score which is based on five key pillars i.e. earnings, fundamentals, relative valuation, risk and price momentum. This implies that there has been a significant improvement in their market outlook in the given time frame.

​​The search has led investors rushing for proxy sectors likely to benefit from f these trends. A case in point is the countrys $10 billion cables and wires sector. The total market capitalisation of listed C&W companies such as Polycab, KEI Industries, Finolex Cables and Havells has trebled in the past three years to hit $30 billion.

The kind of correction the broader market is witnessing in the last few days, the financial services sector had seen that few months ago. Infact, if one looks at the overall picture this phase of correction was led by one private sector bank and the other parts of the BFSI came under pressure at the start of 2024. For two reasons, first is that RBI has been doing a policy tightening and regulatory cleanup excerise, so there were some margin hits coming in earnings. Second, they are heavily owned by foreign portfolio investors who have been sellers in the Indian markets. A large number of times they give an advance indication of what the broader market might look like in near term. Similarly, the other way round, these stocks on a relative basis have performed better than others in the last few days. The first streak of relative outperformance is good enough indication for them to be brought on watchlist.

About 57 smallcap stocks delivered double-digit weekly returns with four of them offering over 25% returns. Jaiprakash Associates was the top gainer in the pack with nearly 40% return, followed by SEPC Ltd (35.1%), Greenlam Industries (29.6%), and Apollo Micro Systems (25%).

The 10-year yield is close to hitting 5% for the first time since 2007. We asked some of Wall Street’s brightest how to play it.

“The next couple of years should be better for pharma companies as the pricing outlook keeps on improving and the cost pressure is moderating as well for inputs like APIs, chemicals, etc. So, generic companies or those with a good specialty portfolio, should do well in the next few years.”

Gautam Duggad says: In any bull market, we will always find some things are getting too expensive and frothy and some things are always available where you can still justify, for example, that the domestic cyclicals like hotels, real estate, some of the consumer discretionary names where the earning support is very strong, are the spaces where money can be made.