Most of you might be feeling confident about the current market rally. If someone asks you whether this rally is sustainable, you may answer affirmatively. The sentiment is strong and knowing the pulse of investors, mutual fund houses are launching New Fund Offers (NFOs). Response of investors has been robust to these NFOs. This is surprising that investors feel confident about markets when valuations are expensive and they hold back when valuations are really attractive. Those who are investing now, expect a strong rebound in the performance of Indian companies. Experts are echoing optimism and raising their estimates on earnings of some of India’s largest companies. PersonalFN tells you why you shouldn’t you get carried away by bullish estimates.

Earnings upgrade…
As reported by Business Standard dated October 06, 2014, based on expectations of analysts polled by Bloomberg, Sensex companies may report healthy growth in the July-September quarter of the current fiscal. Cyclical sectors such as Automobile and Banking are expected to record more than 20% jump in profits as compared to that reported last year during the same timeframe. Similarly, export oriented sectors such as Information Technology and Pharmaceuticals are likely to register above 15% growth in profits during the 2nd quarter of Financial Year (FY) 2014-15.

Constituents of S&P BSE Sensex excluding energy companies are expected to record, 10.9% rise in revenues and 16.4% increase in profits on Year-on-Year basis. Positive factors that may help companies report higher profits include;

• Falling Rupee
• Strong consumer sentiment
• Falling input and raw material cost
• Cyclical pickup in a few sectors such as Autos
• Better forex position of the nation and falling current account deficit
• Robust performance of export oriented sectors
  
  

There have been some sector specific factors that have lowered the expectations from the Oil and Gas segment.

Is growth momentum in earnings sustainable?
So far, Sensex companies have maintained steady improvement in quarterly performance over a last few quarters. Indian companies may do well in the July-September quarter as expected; however, it is not an easy task to sustain similar performance going forward. Other economic indicators are still negative.

Manufacturing PMI has fallen to 9 month low in September indicating slack in the manufacturing activities. From 52.4 points in August PMI reduced to 51 points in September. Although new orders went up for the straight 11th month in September, their pace was nearly at 11-month low in September. Demand is still weak due to which companies are cutting inventories rather than producing more goods. As reported by the Financial Express dated October, 06, 2014, based on the corporate announcements, capital expenditure of top 20 companies is expected to be lower by 13% this fiscal as compared that in FY 2014. Fragile state of Indian banks and the weak demand have been the most prominent reasons for lower expenditure on capacity additions.

S&P BSE Sensex has advanced about 5% in the second quarter but has given up gains towards the end of the quarter. It moved in the range of 9%-10% throughout the second quarter of FY 15. In case earnings fail to meet expectations, the market may witness a deeper than expected correction.

What investors should do?
PersonalFN always recommends investors not to speculate on a specific sector or a stock. At this stage, when markets seem to have run ahead of their fundamentals, investors shouldn’t bet aggressively on equities. There is always a possibility that you may get carried away by tall claims made by your stock broker. PersonalFN believes you should instead invest in mutual funds as they are managed by professionals. Equity mutual funds are only for long term investors. You need not keep a track of quarterly performance of companies. Fund managers are well-equipped to assess investment opportunities. Their experience in managing money may prove to be beneficial for you. However, you must be careful while choosing a fund. A mutual fund that has a track record of good performance across timeframes and market phases and the one coming from process oriented fund house stands a better chance to outperform broader markets. To get unbiased advice on mutual funds, you may try out research services provided by PersonalFN.

Add Comments