The Chinese meltdown has taken along all the stock markets, indicating the power of globalisation. But a more pertinent issue is what do stock indices indicate in general? Do they tell you how the economy is performing or how it expects the corporate sector to perform in future? Or is it plain whimsical but very important as it involves a lot of money considering we have 14 hours of electronic media attention glued to these indices and all economic action is interpreted in the context of stock markets?
To know more let us look at the Nifty, which is taken to be the benchmark that reflects everything about Corporate India. It is widely believed that everything follows the Nifty and the correlation with all other stocks is very high.
The table looks at how Nifty has moved along with two financial parameters over the past five years. The Nifty growth rate has slowed down in the first two years, declined in FY12 and risen quite sharply in the years described as times when there was a policy paralysis, with a new high being witnessed in FY15.
The growth curve was U-shaped — declining and then rising. Now if this were juxtaposed with how these 50 companies were performing, two indicators can be used. In terms of corporate performance, it is the net profit margin (NPM) which is important and here the trend has been completely downwards with a total loss of 240 bps over five years. Quite clearly, this did not affect the Nifty, where the market initially followed this trend but then later disregarded the same.
In terms of EPS, a confused picture emerges. Ups and downs do not necessarily correspond with market movements. At times experts interpret the market in terms of ‘expected earnings’ moving up or down. Hence if markets expect earnings to rise, then it gets embedded in the price today. Using this data as an expost explanation, we cannot derive this conclusion unless the market has been miscalculating these projected earnings repeatedly.
For non-Nifty companies, the picture is even more glaring. EPS has been falling sharply to 2.69 in 2014-15 from 7.12 in 2009-10, which means the performance from the market’s view is dismal. Correspondingly, the NPM declined by 430 bps as these companies were under pressure on the price and cost fronts.
What does all this add up to? First, the Nifty is representative of the best companies in the country, which in a way shows resilience in the most challenging times. Second, Nifty movements are not really linked with the performance of these companies. The fact that when earnings are lower does not stop the index from increasing indicates the presence of irrational spirits or higher interest by investors that may not be linked to fundamentals.
More importantly, we ascribe a lot of importance to the stock market as being reflective of the corporate sector. Benchmark indices are specific to a set of the best stocks and do not reflect the trends in Corporate India. The rest of the companies have been on the downhill, as also reflected in the rising NPAs and restructured assets.
The takeaway is that the Nifty movements and companies cannot be interpreted as a reflection of the state of the overall corporate sector. The Nifty accounts for around 60 per cent of overall market capitalisation and if we add another 50 companies nearly 75 per cent would be covered.
While all stocks would tend to move in a similar direction based on an external shock, their movements may not be in consonance with fundamentals of the companies. So, to go back to the question posed in the beginning, the market is all about whims involving big money and it is hard to trace a method in the madness.
To know more let us look at the Nifty, which is taken to be the benchmark that reflects everything about Corporate India. It is widely believed that everything follows the Nifty and the correlation with all other stocks is very high.
The table looks at how Nifty has moved along with two financial parameters over the past five years. The Nifty growth rate has slowed down in the first two years, declined in FY12 and risen quite sharply in the years described as times when there was a policy paralysis, with a new high being witnessed in FY15.
The growth curve was U-shaped — declining and then rising. Now if this were juxtaposed with how these 50 companies were performing, two indicators can be used. In terms of corporate performance, it is the net profit margin (NPM) which is important and here the trend has been completely downwards with a total loss of 240 bps over five years. Quite clearly, this did not affect the Nifty, where the market initially followed this trend but then later disregarded the same.
In terms of EPS, a confused picture emerges. Ups and downs do not necessarily correspond with market movements. At times experts interpret the market in terms of ‘expected earnings’ moving up or down. Hence if markets expect earnings to rise, then it gets embedded in the price today. Using this data as an expost explanation, we cannot derive this conclusion unless the market has been miscalculating these projected earnings repeatedly.
For non-Nifty companies, the picture is even more glaring. EPS has been falling sharply to 2.69 in 2014-15 from 7.12 in 2009-10, which means the performance from the market’s view is dismal. Correspondingly, the NPM declined by 430 bps as these companies were under pressure on the price and cost fronts.
What does all this add up to? First, the Nifty is representative of the best companies in the country, which in a way shows resilience in the most challenging times. Second, Nifty movements are not really linked with the performance of these companies. The fact that when earnings are lower does not stop the index from increasing indicates the presence of irrational spirits or higher interest by investors that may not be linked to fundamentals.
More importantly, we ascribe a lot of importance to the stock market as being reflective of the corporate sector. Benchmark indices are specific to a set of the best stocks and do not reflect the trends in Corporate India. The rest of the companies have been on the downhill, as also reflected in the rising NPAs and restructured assets.
The takeaway is that the Nifty movements and companies cannot be interpreted as a reflection of the state of the overall corporate sector. The Nifty accounts for around 60 per cent of overall market capitalisation and if we add another 50 companies nearly 75 per cent would be covered.
While all stocks would tend to move in a similar direction based on an external shock, their movements may not be in consonance with fundamentals of the companies. So, to go back to the question posed in the beginning, the market is all about whims involving big money and it is hard to trace a method in the madness.
No comments:
Post a Comment