Keep Your Eyes on the Earnings
It’s actually quite unthinkable that the Sensex should touch 50,000 at a time when the pandemic is not yet over and global economies are still to attain normalcy. As such, the recent correction of more than 2,000 points in the Sensex over four straight sessions does not come as a surprise. We have been advising our readers lately to reduce exposure and take some bets off the table. Prolonged dips from the current levels will be good for long-term investors as the correction will yield to higher returns while reducing the risks for investing. Fortunately, the year 2021 has started on a strong note with as many as 419 stocks gaining more than 20 per cent on YTD basis.In addition, an impressive 739 stocks have strengthened by more than 10 per cent already.
Owing to superior earnings’ performance of several listed companies, the heightened valuations are looking a lot more comfortable than before the earnings’ season. The market is trading at historical high valuations when compared to its long-term averages. If there is one thing the market has taught us in history, it is to not ignore the valuations. Also, one must note that the major tops in the markets have been mostly made in the JFM quarter. In the meantime, the price rise in several commodities is threatening to impact the margins in the coming quarters for several industries.
Increase in steel price leading to a price rise in cars by Maruti Suzuki is just a point in case. One will have to watch closely how the dynamics shape up between the commodity prices and margins for several manufacturers. With stretched valuations and the recent record risk rally, we believe the future may belong to value stocks. To identify value stocks, one may have to adopt a contrarian style of investing and curb one’s enthusiasm for chasing growth stocks with sky-high PE multiples. For example, Asian Paints is great stock, but can it sustain a PE greater than 88 levels? How long can TCS trade with a PE multiple of close to 40? Berger Paints is trading at 149 odd PE multiple.
These are great stocks backed by sound business models, but the question is whether they can sustain at the current valuations. In our cover story we have explained why contrarian investment may work in the current environment. The article also highlights the myths surrounding the contrarian investing style. Do have a look at our top contrarian picks as well. To move on, gold has been in the limelight ever since it crossed Rs 50,000 per 10 grams in 2020. We have analysed the gold demand and shared our view on its performance in 2021. I am sure our observations will help you build conviction in the shining asset class.
In our two different special stories we have highlighted investing opportunities in the electric vehicle (EV) space and in the beaten-down stocks. Our recommendations in the EV space may especially interest you. For long-term investors it is essential that one aligns the portfolio according to earnings. The earnings season has started on a positive note and indicates that the situation on the ground is improving. Have faith in the equity asset class, keep a longterm investment horizon, avoid leveraging in the current market condition and keep greed at bay. Tip: Hedging is always important when the markets have climbed the wall of worries nonchalantly.
RAJESH V PADODE
Managing Director & Editor