There’s always a sequence that cycles follow:
First, it was macroeconomic indicators that raised concerns
Then came monetary policy action
Then sometime before tightening started affecting the economy (slowing GDP, crash in the housing market)
And then corporate earnings started reflecting the slowdown
Finally, monetary policy tightening will slow down as its objectives get achieved, marking a reversal in the cycle
The US markets seem to be entering the fourth stage, with disappointing earrings:
Amazon’s cloud business grew slower-than-expected, and sent shares plummeting 19%
Meta crashed 20% after sales declined in 3Q
Alphabet’s ad revenue grew by a measly 3%, sending the stock down 6%
Snap’s revenue per user fell 11%, and overall revenue grew by just 6%; the stock fell 27%
Banks seemed to go through pain as trading and deal-making activity slowed down, and loan demand dried up because of higher interest rates
Sooner or later, all that inflation and interest rate drama was bound to seep down to corporate earnings.
Does this mean, we’ll soon enter the fifth stage of the cycle, and the Fed will soon start slowing down on its tightening?
Maybe! And if it does, that would mark a fundamental shift in market direction.
What does this mean for the Indian markets? Well, India has been operating differently.
Despite high inflation, a weak currency and record-selling by foreign investors, the markets have been rising. Investors remain convinced of India’s long-term growth prospects, and high valuations have been holding up. The MSCI India index continues trading at a record premium compared to the Asian markets.
Earnings have beaten estimates so far, with 15 out of the 22 Nifty 50 companies’ numbers meeting or beating expectations.
Maruti Suzuki’s profits soared 4x
Colgate beat estimates because of price increases
Nestle saw double-digit growth across all categories
HDFC Bank saw an all-round beat
TCS saw better-than-expected revenue growth
With pressures being global, and local action being driven by global macroeconomic developments, any change in the direction of the West will bring cheer to the Indian markets.
That said, we think it’s too early to call this shift out. The US jobs market is still hot, GDP growth is still higher than expected, more aggression by the Fed can't be ruled out, and the global supply problem hasn't gotten any better.
And this makes a case for more inflation in India, more interest rate hikes, slower GDP growth, and corporate earnings being affected negatively; that too at super high valuations.
💡 Our View: We still don't think the risk-reward is favourable. We’d continue to buy on dips rather than going full-fledged positive on the markets.