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US Federal Reserve Chairman Ben Bernanke's comments in support of quantitative easing helped boost market sentiment across the world. Equities, gold, metals and crude oil prices went up. India's Sensex also gained 382 points or two per cent on Thursday, and another 282 points on Friday (the latter partly led by Infosys' results).
But the question is whether these gains are sustainable for India, especially in the light of the rise in oil prices.
In the last financial year, India recorded a 6.7 per cent increase in crude oil import volumes, leading to its import value rising 8.4 per cent to $168 billion or 34 per cent of its total imports of $492 billion. While the Reserve Bank of India (RBI) and the government are taking steps to discourage gold imports, oil imports should only rise, given the estimated 5.5-6 per cent growth in India's GDP in FY14. The average gold price is down from $1,654 in FY13 to $1,417 in the June quarter, while crude oil prices averaged $110.50 a barrel in FY13 and $103 in the June quarter, providing some respite. If global liquidity continues, it should prove supportive of prices across asset classes in the interim period. Currently, while gold is still lower than the Q1 average prices, crude oil is up at $108 and could hurt India.
"An increase in crude oil prices will mean the government will have to maintain cash balance. The balance of payment situation is not good. We need to see how the government tackles the situation," says Manish Sonthalia, vice-president and fund manager at Motilal Oswal AMC.
High oil prices will increase pressure on India's trade balance, increase the government's fiscal deficit and hurt the rupee, stoking inflation and restricting RBI from cutting rates, which are crucial to lower costs for India Inc and consumers.
For markets and foreign investors, what is equally important is earnings growth, which is still not encouraging. While Bloomberg consensus estimates suggest Sensex earnings will grow by 13-14 per cent in FY14, others like Sonthalia believe the figure could be lower. "On a blended basis, I don't expect Sensex earnings to be up more than 8-10 per cent in FY14." Dhananjay Sinha, co-head, institutional research (economist & strategist) at Emkay Global, says, "You can't expect market gains to sustain just because of liquidity. Gains will be sustainable as long as earnings are supportive. Earnings growth is hardly happening. We are expecting 4.5 per cent growth in Q1 for our set of universe."
Most experts believe earnings growth will matter ultimately, as global liquidity always chases growth. While the revival in the US economy should help India's IT, pharma and export-oriented sectors, ease some pressure on the rupee and support India Inc's earnings, a lot will depend on the government's effort to revive economic growth and put its house in order. For now, given the consensus Sensex earnings of Rs 1,426 and assuming India's 10-year average forward PE (price earnings) of about 14.5, experts believe the upside at best could be five per cent.
