Solid December earnings expected to power next leg of equities rally

The stock market is expecting a strong spell of December quarter earnings, which could extend the current rally in the equities into the next few weeks, as the companies are expected to release their earnings reports from as early as this week.  

Stocks extended their 2021 wild run into the new year, after the All Share Price Index advanced by 1,054.93 points or 8.26 percent to end the first week of 2022 at 13,280.94, as the broader stock index crossed the 13,000 milestone and hit several fresh highs during the week, rising for the seventh straight session. 

The S&P SL20 index, which gauges the performance of more liquid stocks, added 321.74 percent or 7.60 percent last week to close at 4,554.99. 

But foreign investor activity had been a sour spot in the whole rally, as they continued to unload stocks worth of Rs.1.68 billion in the week, after net shedding a record Rs.52.6 billion worth of shares in 2021. 

According to analysts, the investors are bracing for another spell of solid corporate earnings, as the companies across almost all sectors are expected to have fared extremely well during their October-December period. Much of the rally during 2020 and 2021 was driven by the sharp earnings of listed entities, as the unique conditions created by the pandemic, such as the record low interest rates, pent-up demand, import controls and strong demand for exports, pushed the overall earnings into 
record highs. 

For instance, the listed entities reported their highest-ever quarterly earnings of Rs.111.4 billion in the September 2021 quarter, up 49 percent from a year ago and 46 percent from the previous quarter. While the default fears have been allayed by the Central Bank for the moment with regards to the settlement of the US $ 500 million sovereign bond falling due this month, the investors are however assessing the extent to which the disruptions faced by the companies due to the current foreign exchange crunch and soaring prices have on their day-to-day operations and thereby the earnings. The December quarter earnings are expected to have beaten the supply chain disruptions and other challenges, due to the brisk pace of the demand, resulting from the easing of lockdowns and year-end festive demand.

Nevertheless, the rising interest rates in the economy and a possible further hawkish tilt by the Central Bank could have an impact on the pace of the rally in the coming months, as the investors could shift their money into treasuries form risky assets.  But higher inflation could still provide some safety for the investors in equities than treasuries, where the real returns could be negative or at least low.