1. What will sustain stock market valuations? 5 top events to watch out for

What will sustain stock market valuations? 5 top events to watch out for

The Sensex bounced back in October on the back of firm global markets amidst improving global economic data, easing of geopolitical tensions, encouraging domestic industrial output and consumer price inflation numbers and stability in the rupee.

By: | Published: November 3, 2017 4:08 AM
Sensex, global markets, global economic data, stock market valuations Although we have been saying that valuations are trading well above historical averages, the sustained flow of domestic liquidity has kept the markets afloat. (Image: Reuters)

The Sensex bounced back in October on the back of firm global markets amidst improving global economic data, easing of geopolitical tensions, encouraging domestic industrial output and consumer price inflation numbers and stability in the rupee. Although we have been saying that valuations are trading well above historical averages, the sustained flow of domestic liquidity has kept the markets afloat. Going ahead, would focus on government measures to drive economic growth, economic datapoints for signs of growth and corporate earnings growth. The important events to watch out for in domestic markets are: Higher govt spending Recently, the government announced Bharatmala Pariyojana which addresses key obstacles in the way of scaling up road construction activity. This project entails capex of Rs 5.3 lakh crore, to be awarded in the next three years, which implies near trebling of the current annual investment rate in the roads sector, thus resulting in healthy order flow visibility for construction companies.

The government is planning to award irrigation projects of Rs 800 billion in the next 1-2 years. Apart from this, it has envisaged river-linking projects. Given these announcements, we expect to see continued investor interest in the infrastructure space. Assembly elections in HP & Gujarat Assembly election in Himachal Pradesh and later in Gujarat would be a crucial one for the markets. Gujarat being the home state of the PM, any setback for the ruling party here would hurt market sentiment and vice versa.

High-frequency data for signs of upturn

For the month of September 2017, volume growth in passenger vehicles and commercial vehicles witnessed strong double digit growth. IIP growth accelerated sharply to 4.3% in August after 0.9% in July, partly reflecting some pullback in production as manufacturers begin adjusting to GST. These growth rates need to sustain in coming months for us to safely conclude that economic upturn has begun.

Corporate earnings growth

Net sales of 172 BSE-listed firms which have reported quarterly earnings so far rose at a faster pace of 8.55% in the September quarter compared with 5.84% growth in the preceding quarter. Net profits after adjustment for exceptional items rose 6.1% (year on year) in the second quarter from 4.43% in the first quarter. Although few more corporate earnings are yet to be declared, we believe that the Q2FY18 earnings growth could still remain tepid. Corporate earnings is still recovering from the twin impact of demonetisation and GST and so it may take a few quarters for corporate earnings growth to fully revive.

FII and domestic flows

FIIs were net buyers for the month to the tune of Rs 17 billion as on October 26, 2017 while mutual funds were net buyers to the tune of Rs 83 billion as on October 26, 2017. Strong domestic inflows have been covering up for the slowdown in FII inflows from past several months. Mutual funds have been buyers worth `946 billion in CYTD while FIIs bought stocks worth Rs 382 billion in CYTD.

Recommendation

Benchmark indices are currently trading at around 18x FY19 consensus estimates. Valuations continue to remain at higher levels for the domestic markets and hence we believe that earnings revival is absolutely critical for such rich valuations to sustain. At this juncture, our preference is for companies that have room for further expansion in valuations and improving earnings trajectory. We like stocks in infrastructure (Bharatmala and Sagarmala projects), tyres and steel products (anti-dumping duty), chemicals (capacity closures in China), urban infrastructure (smart meters and Namami Gange) and defence (make in India). Key risks to our recommendation would come from geopolitical concerns globally, decline in liquidity from FIIs and domestic mutual funds, sharp currency movements and a spike in oil prices.

—Edited extract from Monthly Market Strategy by Kotak Securities

  1. No Comments.

Go to Top