Long-term growth potential for India equities intact: BofA-ML

By: | Published: July 27, 2016 6:05 AM

Indian markets have been carried higher by strong inflows into emerging markets post March, as the correlation of MSCI India and MSCI EM remains high, says a report.

investmentValuation metrics for Indian equity indices have, therefore, expanded meaningfully — and are at post global financial crisis highs, global financial services firm Bank of America Merrill Lynch said in its report.

Indian markets have been carried higher by strong inflows into emerging markets post March, as the correlation of MSCI India and MSCI EM remains high, says a report.

Valuation metrics for Indian equity indices have, therefore, expanded meaningfully — and are at post global financial crisis highs, global financial services firm Bank of America Merrill Lynch said in its report.

India’s long-term growth potential remains intact, yet it is difficult to predict when (and why) the EM tide will recede, it said.

According to the report, the Indian equity market appears expensive on most metrics of absolute valuation. Forward price to earnings (P/E) of 16.7 times is close to highs. Earnings growth forecasts haven’t improved. Price to book (P/B) has similarly expanded, while return on equity (RoE) has not. Mid-cap P/E premiums are at decadal peaks. Dividend yields are below average.

Besides BofA Merrill Lynch noted that on measures of relative valuation, markets are at or only marginally above averages. Premiums to EM are high, but have been higher. Adjusted for growth forecasts, India’s premium to China equities is still below its average, the report added.

Longer-term equity growth has to be led by earnings. Unfortunately, there is little sign of earnings acceleration in India. The Sensex has delivered c.8% y-o-y in 4Q16, and is expected to deliver c.4% in 1Q16. Growth for the larger BSE 500 basket (ex-banks) has slowed from 12% in Dec to 8% in

March. Bloomberg forecasts now suggest Nifty PAT

will grow 17.1% in FY17, down from 20% forecast in January. But these numbers have been continuously downgraded, BofA Merrill Lynch said.

The earnings revision ratio for the market has improved (more upgrades than before), but historically, this has significantly lagged market performance.

On P/E multiples, markets have c.15% downside (to averages).

BofA expects little risk to the operational performance of sectors such as IT, consumer banks, pharma, consumer (discretionary) in the medium term. It believes these could continue to be favoured in Indian equity portfolios.

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