Weak Earnings Could Derail Indian Markets

Tue, 13 Jun Pre-Open

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After a surprisingly good run in emerging markets that sent equities to a fifth monthly gain, Indian bulls seems to be easing up.

As per an article in The Business Standard, India was best-performing among emerging markets (EMs) in the first four months of 2017. But since then, it has ceded this position to South Korea.

The Indian markets are up 24% in dollar terms so far in 2017 while South Korea has gained 25%. During the initial part of the year, India had a huge lead over other EM countries. However, most have since played catch-up, with Mexico and Taiwan also delivering 20-plus per cent return.

The outperformance of EMs is mainly on account of two factors - weakening of the dollar and revival in risk appetite among global investors.

While valuation has reached dizzy heights, earnings are yet to catch up. Investors are hoping that earnings will eventually catch up with valuations. Even the slowdown on the economy due to the notebandi impact has been ignored.

The GDP numbers reflected the recent slowdown in the economy. GDP grew at 6.1% for the fourth quarter of 2017, a fourth consecutive decline for the quarter.

The corporate results for the fourth quarter of financial year 2016-17 also highlighted the slowdown in the economy. The combined results of 2200 odd companies largely showed decent numbers, but still a sharp decline from the third quarter of 2016-17.

It seems the valuation expansion in India has taken the country back to looking less attractive on our fundamental framework.

The overall market valuations look pleasant but hide super-rich valuations of 'growth' stocks and expensive valuations of companies with mediocre business models. It appears as though the market has largely accepted the high valuations of growth stocks as normal valuations without questioning the sustainability of factors like low global bond yields and decline in commodity prices.

However, most analysts and fund managers are optimistic about the prospects of Indian share markets. Goldman Sachs Group Inc. recently raised its Nifty 12-month target to 10,400 points from 10,000 earlier.

They are of the opinion that capex-sensitive firms continue to see increasing opportunities from the government push on infrastructure while consumer-sensitive companies expect rural demand to pick up.

In short, one needs to be highly selective and focused on bottom up approach of picking stocks.

Richa Agarwal, Managing Editor at Hidden Treasure is very cautious about the same. She believes, in times like this, one need to be extremely disciplined about the businesses they are buying. Compromising on the quality of the business could prove fatal in these times.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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