While the Nifty movement was in line with our anticipation- stock moves were violent. The nifty book generated 1.9% for the month, but the stock book bled. In some ways, this was testimony to our uncorrelated strategies between the Nifty and the stock books. Stocks and sectors have been in the make-up-your-mind phase, and soon, the trends will fall back into place. Heightened volatility during this phase is also a normal phenomenon.

We get to hear the dreaded ‘S’ word – ‘slowdown’ more often now. GDP growth for the September quarter was slowest in seven quarters at 5.4%. This was not enough of a trigger for the RBI to cut rates during the 6 Dec meeting, but the central bank did help the liquidity by reducing CRR by 50bps (expected to release Rs1.16trn liquidity). After all, one of 2 key reasons for the slowdown has been sustained inflationary pressure- forcing households to cut spending. RBI could not risk stoking inflation again, hence deepening the problem. The second possible reason is the lower government spending ahead of the Lok Sabha elections in June and two crucial state elections in November (The central government has spent only 40% of the annual budgeted capex till Oct’24). The second reason is easy to reverse- though there is a little dilemma the government today faces post poorer than expected performance in the Lok Sabha elections- how to balance populism and structuralism. In some ways, the dilemma is similar to the one investment managers face- short-term momentum vs long-term compounding. It is not a straightforward tussle to solve.

Meanwhile, the number of companies that mentioned the dreaded ‘S’ word in the earnings call crossed the previous peak of 2H2019, as per the data analysed by Bloomberg Intelligence. Forty percent of the 400 companies out of the NSE500 holding post-results conference calls discuss the slowdown (see chart below). Our channel checks suggest that the expected demand boost from the wedding season is also lower than expected. While we are closely watching, if the resumption of government spending reverses the trend, this is a risk markets need to be prepared for.

Chart 1: % of companies witnessing slowdown

Source: Bloomberg Intelligence, Ambit Asset Management

 

SMIDs outperform

A notable feature of the September earnings season was any earnings-miss was severely punished by the market- irrespective of the ‘loved’ status of the stock or the company. This is a meaningful deviation from the past, where a ‘loved’ company is spared the brutal treatment on a small miss- a price investors have been willing to pay for the longevity and franchise value. This tells the sine-curve that the ‘narrative’ investing phase is over, and the tougher ‘numbers’ investing style is here. There are no pre-established ‘defensives’ – delivery on earnings will determine winners and losers. Intra-sector dispersion can also be very high. In most sectors the second-liners or the Davids have been delivering better earnings growth than the Goliaths’s – and are outperforming.

Table 1: Companies which witnessed earning miss or weaker commentary

Source: Screener & Bloomberg, Ambit Asset Management

*Price results as of 10th Dec 2024

Chart 2: SMID Outperform

Source: Bloomberg, Ambit Asset Management

Examples of few sectors where smaller companies are growing faster 

Source: Companies Financial, Ambit Asset Management

 

Outlook

Despite the sharp bounceback from the lows (at the time of writing Nifty has retraced almost half the 10% losses of November/December) the market is not out of the woods. Earnings risks are high, and while the FPIs have slowed selling so far, can resume if they continue to see the earnings headwinds - and US markets continue to perform. We are keeping a close watch on consumption - as of now all evidence suggests that the weakness continues into December as well. We are short on consumer names (HUL, Dabur and Asian Paints and 2 wheeler names), and have build long in capex as expected sequential pick up in spending by the government (Larsen, Siemens, BEL) and banks (HDFC Bank & SBI). We are playing techs through Secondliners (better growth). However, how much does the government capex revive will need to be watched carefully. If the slowdown, which we saw in the Sept quarter persists, markets should see a second drop to break the lows. We are playing the rally with caution, and are keeping dry gunpowder to build shorts again, should that happen.