Earnings yield spread of mid-caps, small-caps and micro-caps to large-caps getting into unattractive zone which will likely result in muted returns ahead
Note: Large-cap – top 100 companies by market-cap rank, mid-caps – next 150 companies (101-250th rank), small-cap companies – next 250 companies (251 to 500th rank), and micro-caps – next 500 companies. Above chart refers to trailing earnings yield spreads of mid-, small- and micro-caps over large-caps at each point in time. Only profitable companies are considered in the calculations.
Source: Bloomberg, Capitaline, I-Sec research
“Technically, a more than 20% upside indicates a bull market. Earnings yield spread of mid- and small-caps over large-caps evaporates to zero while it contracts significantly for micro-caps to 70bps, indicating extremely low risk aversion. Economic environment remains favourable as indicated by high-frequency macro indicators (capex, GST collections, PMI, credit growth, etc.),” noted Niraj Karnani of ICICI Securities.
Why domestic macros appear robust
Capex indicators: Central and state capex YoY growth picked up by a significant 59% (Rs 2.8 trillion vs Rs 1.8 trillion) and 63% ( Rs 1 trillion vs Rs 0.6t trillion) respectively in FY24 so far. Real estate demand continues to be robust driven by demand for higher-end products.
Core sector and credit growth improving: Core sector growth for Jun’23 was 8.2% YoY and fortnightly non-food credit growth as of 14th July’23 was 20.4% YoY (adjusting for HDFC Ltd merger, it is 15.1%).
Strong manufacturing & services: PMI-Manufacturing at 57.7 and PMI Services at 62.3 for Jul’23 are strong, and so are GST collections at Rs 1.65 trillion for the same month (11% YoY).
Automotive wholesale: Amidst seasonal weakness, wholesale volumes sail through smoothly with CVs showing strength and PVs and 2Ws holding steady.
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