Stock market bets on Nifty Financials; expects profits to double by FY24

By Rajiv Ranjan Singh

February 08, 2022 at 10:28 AM

Indian indices Nifty 50 and BSE Sensex delivered phenomenal returns in the last two years. From the pandemic low of 7,511 in March 2020, Nifty has gained around 9,700 points, while Sensex zoomed over 32,000 points from March low of 25,639.

Equity markets’ phenomenal rise was supported by adequate liquidity sloshing around the globe. Thanks to massive balance sheet expansion by Federal Reserve and European Central Bank (both expanded $4 trillion) since pandemic, equity markets across the globe were awash in liquidity.

Also Read: Budget 2022: 10-yr pre & post budget sessions throw interesting trend; Nifty reverses

In India too, Reserve Bank of India pumped in excess liquidity in the financial system and expanded its balance sheet. Greed and Fear report by Jefferies believes RBI balance sheet peaked in October 2021 at ₹64.4 lakh crore and currently stands at ₹63 lakh crore. With RBI absorbing ₹1.4 lakh crore from the banking system in the last three months, days of easy money policy are over. Central banks across the globe are either planning to lift rates and absorb excess liquidity or have already raised interest rates, like Bank of England and Brazilian Central Bank that raised rates last week.

In the backdrop of changing monetary stance, investors are wondering what could lift Indian indices?

Street optimism on Nifty Financials

Stock index performance primarily depends on profits made by constituent companies. Market participants believe Nifty Financials, which hold 37.5% weightage in the broader Nifty 50 index, will give stellar performance in the next two years. Harshad Borawake, Head of Research, Mirae Asset Investment Managers, believes Nifty Financials that include banking, insurance and asset management companies will do the heavy lifting for Nifty. “Provisioning cycle for banks has normalised and the bulk of Nifty profit growth in future will come from Financials,” he adds.

Also Read: 1,350% return in 5 years! Do you own this multibagger stock?

Harshad is not alone in his optimism. Investors are pinning their hopes for earnings revival on Financials. As per Bloomberg Consensus estimate, Nifty EPS is expected to grow by 19% and 16% in FY23 and FY24 to ₹882 and ₹1,020 per share. During the same period, Nifty Financials EPS is expected to grow by 27% and 21%.

The street is expecting a cumulative profit of ₹1,96,230 crore and ₹2,37,616 crore from Nifty Financials companies in FY23 and FY24. In FY21, cumulative profit of Nifty Financials was ₹1.2 lakh crore, while in FY20 it stood at ₹1.02 lakh crore. Street optimism is evident from the anticipated numbers that show companies in Nifty Financials are expected to double earnings in just three years.

This optimism is well captured in the share price of State Bank of India which clearly outperforms broader Nifty with a handsome return of 35.65%, compared to index return of 15.34% in the last one year. State Bank of India is India’s largest bank in terms of assets and well captures the banking landscape of the country.

Also Read: IndusInd Bank files bankruptcy against Zee over default

In 2018, public sector banks including SBI were making a provision of 2% to 2.2% of total assets, which has now come down to 1% to 0.8%. Reduced provisioning is strengthening the bottomline and earnings per share (EPS) of the Financials. Most of the future profits of banking sector will come from normalisation of provisioning, believes Borawake.

High hopes from the banking sector is visible in returns of the Banking index. Most of the banks have announced Q3 results and in the last one month Nifty Bank, with a return of 0.68%, has massively outperformed Nifty 50 that yielded (-)3.36% in the same period.

 

Valuation Conundrum: Why Nifty Is Still At A Reasonable Level

Beginning today in a 3-part series we look at the current euphoria around the Indian stock markets when experts are confused with the meteoric rise of the markets despite no comparative growth in the economy. We try and solve this conundrum. Today we analyse the comparison between the interest rates, which are at a two-decade low, and the forward price-earnings multiple (forward P-E) of Nifty.

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Rajiv Ranjan Singh

Updated: 06 Oct 2021 2:34 pm

Potent mixtures of momentum, exuberance and unchecked animal spirits have produced massive inflation in financial assets. All of this is a bit puzzling for the ordinary folk. The price growth is exponential, but experts and market veterans are not flummoxed with the accelerating index values and many valuation theories are circulating to justify the rapid upmove.    

One of the theories that is gaining ground is the comparison between the interest rates, which are at a two-decade low, and the forward price-earnings multiple (forward P-E) of Nifty.

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For starters, it is important to note that stock markets ignore the past and follow future prospects. Thus, analysts and fund managers focus on forward earnings (profit) rather than trailing earnings.

The Nifty index is a composition of 50 stocks. A stock is worth the present value of the stream of cash flow that it will produce in the future. The present value is calculated by projecting out future free cash flows and discounting them back to the present. Thus the interest rate that is used for discounting is the key matrix for the valuation of the index and stocks.

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The most important point to remember is that interest rates (discount rates) and the present value of cash flow are inversely related. So, lower interest rates means higher present value. In India, the 10-year government securities (G-sec) rate is used as the discounting rate while valuing a company.     

Low interest rates are usually good for companies just like they are good for ordinary folk, who buy houses and gadgets on loan. Low interest rates enhance companies’ earnings and earnings per share (EPS). Thus, during a low interest rate regime, the forward earnings multiples are at a higher premium to their five- or 10-year average.

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As per Bloomberg Consensus estimate, in FY23 (from April 2022 to March 2023), the Nifty EPS would be Rs 873. Based on the closing price on October 5, the Nifty ended at 17,822 points, which means it is trading at 20.41 times one-year forward earnings (17822/873).

Speaking with Outlook Money, Jaspreet Singh Arora, chief investment officer, Equentis Wealth Advisory Services Pvt Ltd, said before covid hit India in March 2020, the 10-year average of Nifty earnings multiples was 19. Today the P-E multiple of Nifty is 20.

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“Do you think we are in a bubble zone or stretched valuation when P-E multiples move from 19 to 20 which is just 5.2 per cent above the decade average?” he asked.

Arora has a valid point when we stop seeing the P-E multiples in isolation and count the factors that are driving it higher than its historical average. One of the factors is interest rate. Currently, the 10-year Indian G-secs are yielding 6.25 per cent, which is 20 per cent lower than its 10-year average of 7.5 per cent.

Keeping in mind the 10-year averages, while there is just a 5 per cent premium on the Nifty's forward earnings multiple, the interest rate used for discounting to get the present value of a stock is 20 per cent lower. If all else remains equal, then the Nifty is still at a reasonable level and may move much higher from the present levels.  

Sushil Kedia, founder and chief executive officer, Kedianomics, believes that the stock market has produced enormous profit for investors and there is immense liquidity that is supporting the upward rally.

“Markets the world over are inebriated on internal liquidity generated by market profits and sector rotation is technically keeping markets saved from the bunching up of volatility,” he said. Till the time sector the rotation remains, there is no point trying and calling any top for Nifty, he added. 

MIND OVER MONEY MEDITATION

 

Mind Over Money: This CEO explains how meditation makes you an effective trader

Mind Over Money: Why a healthy mind is important for a trader

Synopsis

The reason trading is so glamorous is not just because there is a possibility of making a lot of money but also it is the place where one has to face their worst fears which is emotions, says Ashish Kyal.

By Kshitij Anand, ETMarkets.com

Last Updated: Apr 23, 2022, 09:55 AM IST

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Ashish who has an experience of more than 15 years has trained more than 10,000 students. In an interview with ETMarkets, Ashish Kyal, CMT, Founder, and CEO at Waves Strategy Advisors, said: “Traders who can survive and flourish are the ones that have been able to overcome their weakness, become disciplined and do not pay attention to the immediate outcome but continue to follow the process as long as their methods have an Edge.” Edited excerpts:

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Markers are complicated and to outsmart the beast one needs to remain calm to tackle volatility. One of the best ways to combat stress is meditation. What are your views?
Markets and meditation should go hand in hand. To understand the importance of meditation let us first understand a little more in-depth about trading and investments.

 reason trading is so glamorous is not only the fact that there is a possibility of making a lot of money but also it is the place where one must face their worst fears which is emotions.

Trading and Investments keep the person on the edge. But, to be successful it is important to be extremely disciplined. The person should have perseverance, and emotional strength to withstand when things do not go the way it is expected.

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The best or the worst part is that the results are instantaneous – whether you made money or you lost. This is not the case in any other business.

In other businesses, if one takes a wrong decision, it can be corrected eventually or the same will be reflected in the P&L after a quarter.

There is a clearly defined gestation period. Unlike this, traders must face the outcome of their decisions immediately. So, this can simply be both financially and emotionally challenging.

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Traders who can survive and flourish are the ones that have been able to overcome their weakness, become disciplined and do not pay attention to the immediate outcome but continue to follow the process as long as their methods have an Edge.

This brings us to the most important aspect “Renunciation of fruits” mentioned in all of the major Puranas across religions. But it is easy said than done. There are various ways to get there and one such way is Meditation.

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Meditation is a process where we try to be aware about ourselves may be with thoughts, emotions, or energy. It is misleading when many says that by way of meditation one can control the mind.

The function of the mind is to generate thoughts and one cannot control it but only be aware of it. If one tries to stop the thoughts, they will get more intense.

Meditation is a way of making oneself aware of the circus going on in the mind. This opens the possibility of creating a distance from the mind by way of self-realizing this is just an accumulation of information.

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By doing this the person is slowly moving towards the truth which is conscious action. In the process, the ability to think gets enhanced sharply. This will also calm down the mind which will reduce the number of thoughts getting generated randomly and our emotions will be under check.

So, meditation is only about getting aligned towards conscious activity rather than doing things unconsciously.

As a trader, there are many decisions that we take during the spur of the moment but only later to realize how stupid it was to even have taken that decisions.

But, understanding the mind functions differently under stress, anxiety when emotions are running high and our decision-making ability gets highly compromised.

So, meditation is a way to enhance our perceptions take conscious decisions as per our ability when it is most needed rather than regretting after seeing markets in hindsight.

You have trained more than 10,000 students in a span of 15 years. I know that for a fact that you make sure to equip your students in meditation – why is it important especially when they are in early stages?
During the early stages of a trading career our mind is like a river. It can be molded easily into the right direction.

Slowly and steadily as time passes there are strong concrete opinions one starts creating about everything – this works, that does not work.

Now, during that scenario trying to put in meditation becomes all the more difficult because even before a person starts putting this into practice there is already a pre-conceived assumption that it will not work.

So, making mind to meditate will be all the more difficult as long as strong opinions are not shattered. This means redefining the entire process of trading again and then putting meditation as an important part of that process is required.

So, it requires a lot of unlearning and then only new learnings will happen. It is therefore important to put meditation as an important part of the trading program early on in the career, rather in any field or business.

Is there any specific technique you teach them?
Most simplest technique that I teach to my Mentees is being aware about breath. This is known to majority but seldom put to practice. Many if asked to be aware of breath will try to do breath. This is not the way.

One needs to understand that the breath is anyways happening whether we want to do it or not do it. Awareness is already there. What is required is to align our awareness to our breath.

Initially, there is a tendency to get deflected and lost among the thoughts. It is required to get the awareness aligned to the breath again.

By practicing this simple way of meditation, one is moving away from untruth of mind which is accumulation of information towards truth of life which is breath that is binding us to this body. This will automatically bring down anxiety, tension, stress which is most important for a trader.

What is the kind of difference you see in students who go on becoming a full-time trader doing meditation and a person who is just a trader?
One very notable difference is the outcome. Many traders practice some form of Yoga or sports to divert their mind. They might be doing it without being conscious that it is a way of moving awareness away from the mind to the conscious reality.

So, I would not say that if a person is not practicing mediation cannot be successful because playing a sport itself can be a way of meditation. For that matter being completely involved in the activity at hand is meditation.

So, to be successful in any field this is the most basic premise and there are multiple ways to achieve it.

Meditation help you not just manage stress, but it also helps you becoming an effective trader. What are your views?
Absolutely, Mediation helps to not only become an effective trader but a successful person because what we define as success is also very relative.

Making money is only one aspect to measure success in trading but the other aspect is how disciplined, calm, joyful you are during the process that defines it.

Any case study which you remember that cemented your faith in meditation?
There are many instances that can be beyond the logical science explanation that has cemented my faith in meditation. But given the restriction of words or without much digressing from the topic one such instance had been during the period of March 2021.

Covid-19 had been widespread during 2021 and I was detected with Pneumonia which went unnoticed as Covid since this was the new variant. I was hospitalized for 12 days and the symptoms were getting worst during the first 2 days.

Later, I decided to not give up on a few of my meditative practice and sitting in hospital I stick to my process. Post the 3rd day the symptoms of high fever, shivering vanished just like that but the reports still showed deteriorating conditions.

Doctors were surprised or rather shocked that the reports and symptoms were exactly opposite which looked impossible as per medical science. In fact, from the 4th day I was taking trades on Options from hospital bed.

Now, the ability to do that during such scenario is possible only if you are either high or strongly grounded. As I was in hospital the first one was not possible so it has to be the second one to be able to trade from 3rd day itself during a 12 day hospitalization period.

Any 5 reasons why people should do meditation to become an effective trader?
Here are few reasons -

• To trade effectively without getting into the emotional flux
• Enhancing decision-making process
• Perceive things that majority are missing out
• Never get carried away or have FOMO feelings but to be strongly grounded and disciplined
• Most importantly to be joyful in every aspect of trade outcome