After a stunning 30% return in 2014, the Street has tempered its expectations for 2015 and is hoping for a gain from the stock markets of anywhere between 15% and 18%, reports Devangi Gandhi in Mumbai. Even this would put India among the best performers among the emerging markets (EMs).
The expectation, based on a recovery in the economy and corporate earnings spurred by lower interest rates and commodity prices, comes with the caveat that the government must push through reforms quickly. “The government may want to engage with other political parties
and opposition-ruled states in order to ‘sell’ its economic vision,” Kotak Institutional Equities wrote recently.
While views on fund flows vary, Goldman Sachs expects global fund flows and the interest of domestic investors to support the market momentum.
It points out that global funds and ex-US funds, that collectively account for more than 60% of the $967-billion equity mutual fund pie, are relatively underweight on India by 40 basis points, compared with benchmark MSCI index, and may drive the next round of inflows.
Views on the earnings recovery differ too. Morgan Stanley believes the key to the valuation story and India’s performance in 2015 lies in the forthcoming earnings cycle: It sees the EPS of the Sensex companies growing at an average of 24% in FY16 and FY17.
On the other hand, Citi, which has put out a 2015 target of 33,000 for the Sensex, believes that a consistent uptick in the economy and earnings are likely only in mid-2015. The brokerage says there is modest near-term visibility on loan growth and investments and caution among corporates while regulatory reforms are still under way. It adds that 2015 should be front-loaded with falling rate gains, back-loaded with an actual economic/investment recovery and accompanied by steady regulatory, execution reform.
Macquarie Securities feels the market still has some re-rating potential and has a target of 9,940 for the Nifty. It points out that the consensus forecast of a 19% growth in net profits for FY16 is much lower than the ~40% growth levels seen in previous up-cycles and doesn’t factor in the impact of operating and financial leverage as demand improves, inflation abates and interest rates ease.
Although the current valuation multiples — about 15 times EPS and three times book value — are a tad above long-term average, “ the market can re-rate further to 16-17x if economic recovery is stronger than expected”. it says.
Most brokerages including Goldman Sachs, Deutshce Bank, UBS and Macquire are suggesting higher weightages for banks as a play on the economic recovery. However, some analysts see the pain in the banking sector prolonging as the leverage of India Inc, especially from troubled metal and power space, continues to weigh on their financial performance.
Neelkanth Mishra, MD and head of India equity strategy, Credit Suisse, says downside revisions to FY16 earnings are likely to be led by the financial sector. “The consensus numbers are too high. The bigger part of the earnings cut, of 3-4% will come from financials, materials and industrials,” Mishra told FE recently.
Meanwhile, the Street’s expectations on foreign fund flows vary at a time when both emerging market and Asia ex-Japan funds are substantially overweight on India. Macquarie Securities expects FII flows to strengthen once global conditions become more amenable amidst improving economic outlook for India.
Mishra on the other hand is of the view that given that a number of oil producing countries are big exporters of capital, these flows to India may slow down. He believes FII flows into the Indian market could come down from an average $20 billion in the last three years to about $10 billion in 2015.