The money manager quoting one of Bob Farrell’s 10 rules of trading—markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names—said market breadth has deteriorated and investors should be cautious.
“Broad means when more stocks are rallying versus narrow when less stocks are rising. The broad NSE500 index has seen a deterioration in breadth which is the worst since it bottomed in March 2020. This suggests that the index has more downside left. It’s on a weak footing,” said DSP Mutual Fund.
The market breadth has deteriorated more than it did in earlier phases of correction with just about 16 per cent of the Nifty500 index now above the 50-day moving average. This, analysts believe, is a red flag for trend continuation.
Pointing out that a second indicator shows a rally in Indian stocks may not be sustainable, it said India enjoys a wide valuation premium over its emerging market peers.
“Higher RoE, better incremental growth and steady inflows from institutional investors allow India to have a valuation premium over its emerging market peers. At this time, the premium is at a record. Historically, this has coincided with subdued performance by Indian stocks. A sign of caution for Indian equities,” said DSP Mutual Fund in a note recently.
As Indian companies start reporting their December quarter numbers, investors are also hoping for better performance. Nifty earnings consensus estimates point to doubling of earnings from lows of March 2020 and end of March 2023. This will rival the great run of noughties.
But, the question is, can this be achieved?
Corporate earnings haven’t grown at the pace which markets expected over the last many years, DSP Mutual Fund noted. Between FY11 to FY20, Nifty EPS growth change, year-on-year, was 3.8 per cent on an average. In 2021, it crossed the 20 per cent YoY mark for the first time since 2011.
“Can corporate India deliver such strong earnings? At FY23 multiple of 19 times, markets are priced to perfection. Usually markets trade close to 18 times PE. Anything which derails this earnings growth trajectory will spoil the equity market party,” the money manager said.
Opportunity in pharma
The pharma sector did not perform that well during 2021. It underperformed almost all sectors during the year. But now, the operating matrices for pharma have improved quite a lot while its underperformance is at levels last seen in 2012.
“Cash from operations to revenue—a ratio that tells investors how capable a company is, of generating cash from sales—is at record levels which is a positive. While the sector is yet to see any notable price performance, a possible risk-off in risk assets may ignite a rally in the sector in 2022. An opportunity to keep an eye on,” said DSP Mutual Fund.