Since returns in India tend to be high generally, no one cares about the source from where it has come. On this light note, Anoop Bhaskar, CIO, IDFC MF started his presentation at the seventh edition of Cafemutual Confluence.
An article on US market, which says that the majority of the market returns come during earnings season made Anoop delve deeper into the correlation between market returns and earnings in India.
His analysis reveals two clear trends. Over the long term that is a time horizon of over 10 years, he observes that there is significant correlation between earnings and market returns, as index return closely mirror Earnings Per Share (EPS) growth in value. In fact, historical return calculation shows that over long-term, markets move in sync with earnings. Thus, fears regarding market manipulation are unfounded. A similar trend is seen in both India (Sensex) and US markets (S&P 500) where market returns are driven by EPS growth.
This observation, however, does not hold true over the short term. In the short to medium term horizon, he observes that there is no clear correlation between market returns and EPS. Analysing returns of US index gives similar results. This is even more prominent over the last few years as markets were influenced by excess liquidity due to Quantitative Easing in US. With US Fed tapering the easing program, a more balanced picture is likely to emerge in the coming years.
Anoop observes that over the shorter time-frame, returns are driven more by investor’s time of entry, valuations at the time and the earnings then. In that sense, timing plays a more important role in short to medium duration. Thus, Anoop and his team have further analysed market returns during earning seasons.
The team divided earnings season into three buckets - pre earnings season (10 days before quarter ends to 5 days post quarter end), earning season (5 to 45 days post quarter end) and post earning season (45 days post quarter end to first 10 days of next quarter). The data reveals that 76% of the returns in India come pre-earning season while 12% come during earnings season and post earnings season. On the other hand in US 40% of the market returns come during earning season followed by 41% in the post earnings season and only 19% come during the pre-earnings season.
This has led Anoop to infer that in India there is a general optimism during earnings period driven by higher historical earnings growth. In addition corporations in India unlike US give slightly optimistic guidance as majority of them are promoter driven and thus do not have a scorecard which track if they were able to beat the estimate. Lastly, ‘khabar’ is an important source of alpha generation over short to medium term.
