Market outlook: Elusive earnings to revive in 2018; to grow 26% by FY19

Earnings are slated to grow at a rate of 14% for the current year, making it a watershed year for earnings

The benchmark indices settled year 2017 near record highs, gaining nearly 29%. The BSE small- and mid-cap indices also soared up to 60%. While the markets are expected to carry forward their bullish momentum into 2018, there are concerns about the revival in corporate earnings in the backdrop of overstretched valuations. 

A new year changes the calendar but it need not change the way the markets are behaving.

So don’t expect major changes as we cross into the New Year 2018. There are many things that will remain the same…for the better.

The trend of rising per capita income should continue as our GDP growth improves to 7.3% next year. The population growth being stable at 1.2%, the per capita income would continue to rise, albeit at a faster pace.

The fountain of domestic liquidity is likely to continue to bubble enthusiastically as the reasons that triggered the rush continue to be in place. For an investor wanting to make his money grow, equity markets will continue to be the only sane alternative for higher tax free returns. The FDs aren’t going to give you higher returns and the real estate isn’t going to be any more liquid. The TINA factor for equity investments remains in place.

On the other hand, the taxman’s intelligence on your financial affairs will only improve by the day. While the date for mapping your Aadhaar card with your bank accounts, insurance policies and DP accounts may have been postponed to 31st March, but it is only a matter of time before it becomes operative. 

The ecosystem for the digital transactions continues to improve and it will only add to the convenience of investments and the knowledge of the tax sleuths, which augurs well for the markets.

Let’s take a look at things that will change for the better.

Amongst the best things that will happen to the markets is the return of the earnings. We have gone through a drought of earnings growth. The Nifty earnings have grown at a dismal CAGR of just 3% for the last three years.

We expect the earnings to grow at a rate of 14% for the current year, making it a watershed year for earnings. For FY19 we expect the earnings to grow 26% and by 19% in FY20.

The number one problem for our markets is the rising crude prices. Though CY17 WTI crude has appreciated by just 6.5% in CY17, it has jumped by 36% from the lows seen earlier this year.  

Crude oil has run on the twin engines of OPEC agreement to curtail production and pipeline disruptions across the globe. This is now set to change. 

We expect chinks to appear in the OPEC agreement by June 2018   when the OPEC meets again, as Russia is nervously eyeing the rising US oil production. 

The 500,000 barrels a day producing Keystone pipeline that carries the crude from the Alberta sands to Houston for refining, which was closed for repairs, is now back in action. The 550,000 barrels a day producing Forties pipeline in the UK is likely to start pumping crude again by Christmas. So almost 1.14 million barrels of crude would be back in circulation by end of December 2017, pulling down the crude prices.

While the GST implementation has begun from July of this year, it is still a work in progress. The honeymoon period given for acclimatisation with the new system is now over and the government will start tightening the nuts on implementation. The government is now advancing the introduction of the e-way bill form 15th January, 2018 on an optional basis and from 1 June, 2018 on a compulsory basis. This will have a buoyant impact on tax collections as evasion is plugged.

This will further accelerate the process of business moving from the unorganised to oraganised.

The BJP has snatched power in Himachal and retained Gujarat despite a 22-year incumbency. If the UP elections were seen having put a stamp of approval on the demonetisation move, these wins are an approval for the GST.  

The bottom line is that the public is aware that these are tough decisions taken by a well-meaning Prime Minister who has national interest in mind with no personal axe to grind. 

This paves the way for BJP and Modi to return to power in 2019. This continuity in the government should further increase the confidence of the FIIs in the markets. 

We believe it would be possible to see the Nifty rising to levels of 12,500 by the end of FY18, when the elusive earnings growth plays out. 

V K Sharma, is the Head – PCG & Capital Market Strategy, HDFC securities

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.