As we head into earnings season once again, the news flow continues to be negative ? the manufacturing PMI fell sharply to 55 for June from 57.5 in May and 58 in April and is at its lowest level since September last year. Indeed, car sales aren?t exactly cruising along, despatches of cement have been disappointing and the government shows no signs of getting back to work.
Morgan Stanley expects earnings for its universe of 114 companies to grow 24% y-o-y in the three months to June 2011 which is way above the 11% y-o-y seen in the March 2011 quarter. However, excluding government ?owned oil companies, the growth actually decelerates to 14% y-o-y versus 17% y-o-y in the March quarter. As for the Sensex, earnings are tipped to grow 14% y-o-y in the three months to June 2011 compared with a 4% y-o-y rise in the March 2011 quarter courtesy the SBI fiasco.
Citibank?s numbers don?t look as exciting. Sensex earnings, it says, will grow by just under 12% and ex-oil at 8.5% in the June quarter. Moreover, for its universe (ex-energy), earnings are expected to grow just 8.2%, a tad lower than that in the March quarter though excluding SBI, the number would be a much better 15% plus.
Clearly, a 12-14 % earnings growth is not close to the 18% or so that has been pencilled in for 2011-12. However, the second half of the year is expected to be better since inflation would taper off bringing the rate tightening cycle to an end. Right now, while the sluggish pace of investment does threaten to derail growth, if not addressed quickly, consumption demand remains robust on the back of positive real wages. While the macro environment is not the most conducive, unlike in some other parts of the world, the financial system is stable. In Brazil, for instance, rising interest rates on consumer loans up from 41% in 2010 to 47% in May 2011 have left borrowers reeling and pressures building in the credit cycle. Brazil?s consumer debt service burden, which stood at 24% of disposable income in 2010, is now slated to rise to 28% in 2011. This compares with 16% for an ?overburdened? US consumer and a mid-single digit reading for other emerging markets such as China and India.
Not that everything?s hunky dory in China; a manufacturing index fell in June to the lowest level in 28 months as export orders and output grew at a slower pace. More important, Moody?s says the extent of local government debt may have been underestimated. Of the 10.7 trillion yuan ($1.7trillion) of local government debt examined by China?s audit agency, 8.5 trillion yuan was funded by banks but Moody?s says it identified another potential 3.5 trillion yuan, and estimates the Chinese banking system?s economic non-performing loans could reach 8-12% of total loans.
Back home, NPLs are at a far more comfortable 2.6% and although there are pockets of worry including real estate, telecom, power and SME, banks have set aside enough to cover slippages. Moreover, even with signs of an economic slowdown evident, they?re confident they can lend 19-20% more than they did in 2010-11. So, it?s not surprising that foreign investors have bought $2 billion worth of stock in the last nine sessions; with crude oil prices easing, Indian companies are in for an easier time.