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India is a story of contrasts. The December quarter has been bad for corporate earnings, declined 6.5 per cent compared with a year ago. Weak volumes and margins continued to hurt corporate earnings in the December quarter. Despite this, India continues to lead the pack of emerging markets as far as performance goes. In 2015, MSCI Asia - excluding Japan - has returned 2.5 per cent. Within the pack of emerging markets, India continues to outperform with an absolute gain of 5.9 per cent.
So far, benchmarks have been riding the hope wave with double-digit earnings expectations in FY16. Even after a disappointing quarter, the benchmarks have held on. The divergence might suggest the benchmarks are not tracking corporate earnings. With earnings contracting during the quarter, strategists are now fast coming to grips with the fact that earnings are unlikely to grow 18 per cent (consensus estimates) in FY16. Kotak Institutional Equities sees downside risks to its FY16 estimates as both volume and profitability are likely to disappoint. “The market looks expensive; India's improved macro position is yet to translate into higher earnings,” the brokerage adds.
CLSA’s Chris Wood in his weekly newsletter GREED & Fear says: “In the quantitative easing (QE)-distorted deflationary world of 2015, characterised as it is by zero rates and negative government bond yields, it is entirely logical that investors should pay up for stock markets with a real sustainable growth story, which have ‘normal’ yield curves and which have nothing to do with ‘QE’ or, for that matter, nothing to do with China.”
The near term is expected to see challenges. In January this year, financials were much sought after as they were set to be the best beneficiaries of a revival. However, top brokerages have turned cautious on even some of the private banks. The same is likely for cement, auto, and industrials since there is little sign of a pick-up in economic activity on the ground.
