The third week of results season just went by. The last of the week’s results came from HDFC bank, India’s most adored bank. The numbers were trending down for a second quarter in succession. These numbers are a pointer. When a marquee company tends to trend down in performance, the market confidence hugs the trend. Clearly, banks aren’t going to set the markets on fire anytime soon. Consumption is also trending down and consumer companies are feeling the heat. This put enormous stress on the exporting businesses to prop up the indices. Given that the valuations aren’t cheap, there is hardly any compelling case for a sharp index rise. The direction of interest rates and the political trends will determine how the markets trend in the near future. The results season will probably hurt markets from here.
Iwiz: Earnings can change dramatically. Usually assets change slowly.
The dividend payout from our PSU’s seems to be a perverse idea from the perspective of the companies’ business interest. The government wants to somehow bridge the fiscal deficit and is exercising its powers to instruct payouts. While analysts and discerning investors may dislike the instructive mode of seeking higher dividends, these dividends may throw up an interesting outcome in many PSU’s. PSUs suffer from lower ROE at the moment and these payouts will make them leaner. So, any uptrend in their business fortunes will significantly improve return metrics like ROE. Given the scope for high operating leverage in many PSUs, we could see returns from them trending significantly higher in the coming years .That is the unintended consequence of the one time dividends being forced out of our PSU’s. Serendipitous good in the making.
Istrat: Watch the bad news closely. Look for turnarounds.