Early tidings from the earnings season.

The earnings season has begun. The start of the season always sets the tone and direction for the stock markets. Early results give an indicator of how corporate performance will be and the companies which performed well are usually the ones which release results first. Anticipation of earnings motivates large investors to take a view on the market. The FII’s have already infused substantial money into Indian stock markets in the run up to the results. The domestic funds have predictably taken a contrarian position against the FII’s and sold steadily. The Index has rallied significantly from 5200 levels to 5900 levels. The jury is clearly divided and the FII’s and DII’s find themselves lined up against each other.

Usually, when there is a divided verdict on market direction, the stock markets remain range-bound and struggle to break out of the range. The break out happens only when one viewpoint completely dominates the other. The current indicators show that the FII’s clearly dominate the DII’s and stock prices have been surging across the spectrum. Most scrips have surged in anticipation of the Q4 results and this has propelled the index to 5900 levels. The only scrips which have got left out of this rally are the shares belonging to two Ambani groups. The coming weeks will test the resilience of these two groups to re-establish their position as Index bellwether stocks. The corporate results of RIL for Q4 and the progress in the 2G scam will decide how these two groups contribute to the Sensex movements.

This results season will not just test the Ambani magic. Also the test will be on the Indian stock market’s capability to move beyond the Ambani legacy. The markets need to demonstrate that they have moved on from the era when no stock market rally was possible without a surge in shares of these groups. The market will make a decisive up move only if the current inflow of FII funds sustains and corporate earnings sustain the growth trend .The corporate results of the top companies in the sensex will decide the resilience of the indices to rally irrespective of a muted performance by the two Ambani groups. If the other top corporations deliver strong performance, the index will definitely test the previous high. All indicators are pointing to a strong corporate performance by India’s leading corporations in sectors like banking, IT, power, infrastructure, FMCG and metals.

While it is true that the market leadership needs to move beyond Reliance, the rally will strengthen with a little help from Reliance. A positive earnings surprise from Reliance may well give the market indices the much needed kicker.
Should one bet on this event? If history is an indicator, RIL performed splendidly whenever oil prices headed north. The company always reported bumper numbers when it was aided by good refining margins and higher product prices. The surge in oil from February should help RIL make significant inventory gains and the markets may well be surprised by the extant of gains.

Investors should continue to invest on the basis of a stock specific approach and only use the index trends as a measure of Global investor sentiment on India. Given the strong long term growth story that India promises, it is likely that positive surprises in the result season will significantly bolster domestic investor sentiment and lead to a positive index move.

Happy investing!

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