Despite Omicron scare, earnings delivery holds the key

Driven by a gush of liquidity, low returns from other asset classes and strong interest from domestic investors throughout the year, the benchmark indices ended the year 2021 on a strong note during the last week of the year. The year 2021 witnessed a strong recovery amid continuing challenges from subsequent variants of Coronavirus to outperform its global peers. The BSE Sensex and the NSE Nifty delivered stellar returns of 22 per cent and 24 per cent in 2021, respectively. The broader markets, however, have outperformed the benchmarks during the year. The BSE mid-cap and small-cap indices delivered more than 38 per cent and 62 per cent returns in 2021, respectively. However, it is pertinent to recall that the markets corrected nearly 10 per cent between October and November amid outflows from FIIs. The strong momentum in 2021 was bolstered by robust retail participation, economic recovery, vaccine coverage and rising appetite for Indian goods and services.

Direction of the markets in the first week of the New Year 2022 will be dictated by macroeconomic data like Manufacturing PMI and Services PMI, Omicron situation, monthly auto sales data, FII fund flows, international crude oil prices, rupee movement and global trends. Sectorally, Capital Goods and IT are expected to continue outperformance, while auto, PSU stocks are poised with favourable risk-reward setup. Despite lingering fears surrounding surging Omicron cases, the domestic market is expected to maintain its resilience supported by a healthy long-term growth forecast for the domestic economy. While the market trend might be volatile in the near term on account of potential risk from Omicron variant and fragile global cues; in the long run, strong earnings delivery along with positive macro-economic data would hold the key to drive markets upwards.

Market Musings: Every bull-run has its side-effects and the latest one was no exception to this phenomenon. The unprecedented rally in the stock market may have brought cheers to the investing community. However, it has also raised concerns about a potential risk, particularly to retail participants, arising out of unwarranted exuberance in illiquid, penny stocks that have been scaling dizzying heights on the bourses. Many such stocks have emerged as multi-baggers despite poor credentials. This trend is akin to the frenzy witnessed during the dotcom boom of 2000, which saw many dud companies in the sector rally to abnormally high levels on speculative activity. A decade later shares of mining, trading or export companies were targeted by the operators. Many small investors were lured to invest in a large number of penny stocks only to find their hard-earned money taken away by smart operators, many a time acting in connivance with the unscrupulous promoters. The current boom phase, it appears, is no exception to the victimising tendency prevalent among small gullible investors. There are indications that they may have been chasing penny shares of fundamentally weak companies, thereby risking their investment.

An analysis of the trading pattern in the current market shows share prices of many lesser-known or unknown companies have spurted to unprecedented levels even though their fundamentals hardly inspire any confidence. Many such examples figure on the list of the stocks that have consistently been hitting 52-week highs on BSE. The sharp gains could have been the outcome of normal trading practice without a possibility of any foul play by the entities related or unrelated to the respective companies. Some possibilities such as restructuring of operations, capital reduction, change in management, turnaround hopes could have been the triggers behind the spurt in valuations. While these triggers may have their merit, they hardly justify precariously high valuations in some of the cases.

The jump in the share price of a company of unknown credentials, can't be an accident or windfall, but is possible because of manipulations in a pre-planned manner by an interested broker and entry operators. The abnormal gains, however, have prompted the exchange to keep some of them under surveillance, signalling caution to investors. Caution is the Buzzword for 2022.

Quote of the week: You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets — Peter Lynch

When hit with recessions or declines, you must stay on the course. Economies are cyclical, and the markets have shown that they will recover. Make sure you are a part of those recoveries.

Manufacturers indicate that supply constraints of semiconductors have been progressively improving. Start accumulating automobile counters. The average revenue per user (ARPU) is a key matrix for profitability of telecom companies. Ahead of 5G spectrum auction, telecom companies have been eyeing improved ARPUs by tariff hikes. The government's relief package to the telecom industry has given a breather to telecom carriers, especially Vodafone Idea, which has been struggling in a hyper competitive 3-private player market. Punters expect surprising gains in Vodafone.

Stock futures are looking good Aurobindo Pharma, Hindalco, JSW Steel, Kotak Bank, Lupin and Ramco Cement. Stock futures looking weak are Alkem, MCX, Shriram Transport, Tata Steel and UBL.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)