Your hard-earned savings are waiting to find an appropriate vehicle. They are lying in your bank account, and you are wondering about the right time to get going. However, you realise that the country’s economy is showing a slower growth every quarter, and fewer people have jobs than before. Key lead indicators also suggest that the industrial output has weakened consistently over the past few months.
Despite all this, share prices are gaining ground. Benchmark indices are at a record high. As you learn to connect the dots, data points appear to contradict each other and confuse you. Knowledge is the best weapon you can deploy in such a situation.
We all know that stock markets move in cycles. Share prices broadly move in tandem with future profit prospects of companies. If you are not sure about the direction of the stock market, it is a good idea to concentrate on large companies in some key sectors like financial and IT services, consumer and manufacturing. These sectors can work as a barometer for the future direction of the stock market.
This column has often emphasised the importance of profit growth. It is represented by the Earnings Per Share (EPS) or net profit divided by the number of equity shares of the company. Consistent growth in the EPS is positive, while a drop is negative.
Every sector has some indicators to watch. Here are some broad guidelines:
Financial services
A broad indicator for banks to enhance their future income is credit growth today. If they are lending more money than before, they are likely to earn a higher interest income going forward. A simple internet news search would give you the latest opinion and literature on the direction of credit growth.
The Reserve Bank of India releases detailed analysis of the economy during the credit policy announcement. You can broadly follow the assessment and outlook of the RBI for an indication of future inflation and interest rates. If interest rates are trending down, there is a good chance that the credit growth could pick up. When interest rates decline and credit growth moves up, banks usually improve their profit growth.
IT services
India’s leading IT services firms are dependent on exports. About two-thirds of their revenue comes from the US. When US corporations are doing well, they spend money on IT services. When IT services companies announce their results, they release commentary on the business environment in the US and elsewhere in the world.
If you see a positive analysis, there is a good chance that IT services firms could do better in forthcoming quarters. The reverse is true too. During phases of a downturn, US corporations are quick to reduce new IT spending.
Consumer
In the data released by financial services companies like Bajaj Finance or HDFC Bank, they indicate retail loan growth. Every month, RBI too releases data on growth in personal loans and gives a detailed break-up of how much money was borrowed by way of home loans, cars and credit cards, among other things. When people borrow more for buying goods and services, it is a good indicator of spending.
Besides this, you could look at the commentary released by companies like Hindustan Unilever to get a sense of the way people are buying consumer products. They provide insights every quarter on consumer segments that worked well. Usually, companies do not elaborate at length when consumer segment sales are weaker than before. You may have to rely on media reports or conference call transcripts released every quarter by these companies to get an indication.
Manufacturing sector
Every month, the government releases the Index of Industrial Production (IIP) data. But from an investment standpoint, keep an eye on the Purchasing Managers’ Index (PMI) released for countries. That number shows an intention by businesses to buy more goods.
If the PMI is above 50, it indicates expansion. If it goes below 50, it is considered a contraction. Besides this, the automobile sales data is a good indicator for the manufacturing sector. It is released every month. You can use that information for the outlook on businesses making automobile spare parts and auto fuel manufacturers and marketers too.
(The author is editor-in-chief at www.moneyminute.in)