Interview: Equinomics Research Founder G Chokkalingam On Market Sentiments' Impact On Stock Markets

The Bombay Stock Exchange (BSE) 30 stock benchmark index touched a high of 63,588 on Wednesday before closing at 63,523, recording a rise of 193 points. The increase was driven primarily by a rally led by banking, financial, and information technology stocks. 

NSE Nifty too surged to 18857, and the market capitalisation of BSE firms rose to Rs 294.49 lakh crore in Wednesday's morning trade with ITC, Tata Motors, Nestle India, Larsen & Toubro, and UltraTech Cement leading the pack. Reaching the summit is always great however, one would do well to remember that the air thins out at the peak.

The founder of The Core and financial journalist, Govind Ethiraj, spoke to G Chokkalingam, founder of Equinomics Research, to understand if strong earnings growth, as institutional investors predict, will boost markets in the coming year too or if we will encounter stormy weather.

Chokkalingam said that despite stocks rallying, monsoons remained a concern. He said, "The monsoon remains a cause for concern because the deficit in the cumulative rainfall is almost 33% compared to the long-term average, and only 11 of the 36 meteorological subdivisions have received normal or above-normal rainfall." 

Here are edited excerpts from the interview:

What are you looking at now, and what is your outlook for the near-term future?

Until three weeks ago, I had a bullish outlook on the market in the short-term. I was hoping that the rally would continue up to November or rather until the state elections are held. However, in the last three weeks, there has been a cause for some concern, particularly with regard to the monsoons. Yes, there is a lot of comfort in the economic parameters-except for goods export and FDI inflows-and several macro parameters are now favourable. However, the monsoon remains a cause for concern because the deficit in the cumulative rainfall is almost 33% compared to the long-term average, and only 11 of the 36 meteorological subdivisions have received normal or above-normal rainfall.

We understand that agriculture only accounts for about 18% of the GDP. And, this includes fisheries and forestry (5%-6% ) and irrigated land (4%-5%). So the impact of the monsoon on the GDP will not be much-maybe just about 50-60 basis points. However, what worries me is the sentiment. Inflation and decreased rural demand further complicate matters.

Now, why is sentiment important? Today, the market cap of all listed stocks on the BSE is about Rs 294 lakh crore, and 1% is Rs 3 lakh crore. If there is a sentimental setback due to the monsoon and people rush to sell even 0.5 percent of the market cap, there will be trouble. We have faced a similar situation previously during the US crisis. This is my biggest concern, and hence I would suggest caution and 5%-10% cash in the equity allocation.

Recently, many analysts' reports have been focusing on earnings growth, especially of companies not affected by exports or other factors to do with consumption demand. What is your sense?

This certainly will change. If one considers pockets of the index-large, small, or mid-cap-many have lost the valuation comfort in this rally. So, the rally in the last 2-3 weeks is more of an individual phenomenon. Secondly, there are many sectors that depend on rural -FMCG, two-wheelers, tractors, etc-and one has to account for all of these too.

I firmly believe that investing in equity markets is both an art and a science. Today, fundamentals account for just 30-40%, and the perception for almost 60%, and it is this that creates and destroys wealth. The day that changes there will be the sentimental impact of adverse monsoon performance. Earnings have taken the back seat in the last ten years. 

Consider this: BSE took 145 years to create a 4.5 crore investor base, and it is now nearly 13.5 crore. My sense is that at least 9-10 crore people are new, and the majority do not look at valuation. In my view, the momentum in stocks is what primarily matters, making earnings necessary but not sufficient. It will take a back seat if there is a sentimental impact-there will be a big dent in the market if the monsoon is poor. Further, if the same situation continues for three more weeks, there will be a major problem as the sowing season has already been affected. A further delay will only worsen the situation. 

So, you believe that we should worry more about the sentiment impact? Earnings could drive valuations, however, momentum holds the key. People respond to momentum and not the intrinsic earning capability of the company even if it is good through this difficult period. What if the monsoon was to arrive any day now and things even out in the next 3-4 weeks? What will be your outlook then?

It will be phenomenal. We can expect another 10% rally in the market capitalisation till November; it can rise from the present Rs295 lakh crore to almost Rs350 lakh crore. Why? Over the last two years, we have consistently seen a minimum of 5 lakh new investors entering the market every week, however, there was a lack of confidence. The March meltdown of many small and mid-caps is a case in point. If the rainfall is good, there will be no cause for concern till November, except for the possibility of a war in Taiwan or any other part of Asia. Otherwise, until the major states go for elections, I think the rally will continue, and it will be one of the best rallies we can ever imagine.