A fortnight is a long time in the stock market. Especially, when it is the year’s first one. The markets closed 2011 on a weak note. The outlook looked bleak on several indicators- tax collections, IIP data, the exchange rate, trade data and FII investment data.
Towards the end of 2011, equity investors had virtually given up on the indicators getting better anytime soon. Yet, interestingly, the data flows in 2012 seem to be getting better and caught investors by surprise. So, what has caused the turnaround? Have things changed dramatically? Actually not.
Investors expectations are running very low and nobody was expecting any near term improvement in data. And, that factor has played out favourably on sentiment. We saw tax collections climb up, the rupee gain strength, FII return as buyers, IIP data recovered and the cumulative effect caught the markets by a mild surprise. A phase of consolidation has begun and investors who are waiting for a correction will probably need to correct their strategies.
The infosys results kicked off another results season. Analysts have again begun debating on the ability of our top corporations to beat expectations. This time around, the corporates have started playing down the expectations. The guidances are definitely likely to be soft for the next few quarters. This will put the analysts in a spot as they will be forced to give muted recommendations on stocks. This will certainly lower the market expectations of corporate earnings in the fourth quarter and into the next financial year.
Earnings estimates are likely to be conservative and muted. Given the weak analyst outlook on the earnings of most companies and the increasing tendency among analysts to revise expectations downwards, any outperformance on the revised numbers will be viewed favorably. But, that is something that will possibly take a few quarters.
So, how will the large investors play the markets in the near term? We will most certainly see sectoral rotation. Investors will switch out of defensives like FMCG & IT and buy into commodities, metals and banking which were severely beaten down. This should perk up the overall market in the coming weeks.