On A New Year High
Investors expect 2018 to outdo this year in terms of earnings growth and stock returns

The year 2017 has been a phenomenal one for stock investors. The year has given them a bountiful return of more than 26 per cent regardless of policy reforms that threw the economy off balance and global uncertainties that made for edge-of-the-seat suspense. Even as uncertainties like state elections still hang over the market, investors are betting on higher returns in the new year.

Their wager rests, to a great extent, on a foreseen earnings recovery in upcoming quarters, supported by PSU bank recapitalisation, debt resolutions, infrastructure capex and a low base of earnings.

Many foreign and domestic brokerages have raised their Sensex and Nifty targets for the new year and predicted that returns could be comparable to this year’s.

Global brokerages like Citigroup and Goldman Sachs have cited the bank recapitalisation progra-mme, infrastructure push and sustained flow of domestic savings into equities to raise their Sensex targets.

Citigroup, in a recent note, said it expects the Sensex to reach 33,800 in March 2018, up from an earlier target of 32,200. However, it cut its fiscal 2018 earnings per share (EPS) growth target for Sensex firms to 13 per cent from 17-18 per cet.

 “While earnings disappointments/downgrades continue, the Street should be more optimistic on recovery post the big government push” in the form of bank recapitalisation, infrastructure blueprint and increases in minimum support prices,” Citigroup said.

Goldman Sachs is optimistic about a corporate earnings recovery happening in the second half of the current financial year.

“Re-rating of GDP growth expectations and removal of ‘left-tail’ risk in the banking sector should support India’s price-to-equity premium relative to the rest of the region,” they wrote in a note late October.

Goldman Sachs has also increased its end-2018 Nifty target to 11,600 points, up from a September 2018 target of 10,900 points. 

So far this year, the Sensex gained 26.11 per cent while the BSE Midcap and Smallcap indices outperformed with gains of 42.28 per cent and 52.42 per cent, respectively.

The market was largely driven by liquidity from both foreign and domestic instructional investors. FIIs turned big buyers of equity in November to the tune of $2.95 billion. This boosted their tally for calendar 2017 to $8.75 billion for the 11 months. Domestic institutions continued to pour money into equities, given higher retail money coming in their corpus. DIIs invested $1.4 billion in November and $12.8 billion in the 11 months.

Despite geopolitical tensions, the global economic triggers were positive in 2017. Global economic growth has picked up in recent times and the US has been in the process of increasing interest rates given better growth and low unemployment. Growth has been picking up in Europe as well.

“India suffered from reform-related economic disruptions in 2017, but a recovery seems clearly under way, says Manishi Ray-chaudhuri, head of equity research-Asia Pacific, BNP Paribas, who expects the Sensex to scale 37,500 in the coming year.

He said in a recent note, “We remain confident about Asian equities because (i) economic growth forecasts for 2018 are stronger than those for 2017 for most DM and EM (developed and emerging market) economies, barring a few exceptions; (ii) key Asian currencies are likely to remain stable in 2018; (iii) ROE recovery, a key driver of Asian rerating over the past year, seems likely to continue; and (iv) even after the recent rally, valuations across Asian equities are largely in line with long-term averages and not egregiously expensive.”

Global rating agency Moody’s upgraded the rating of India from Baa3 to Baa2. This will boost foreign funds confidence in the Indian economy. Moody’s cited progress on GST, recent measures to handle banking sector NPAs, and Aadhaar’s potential to reduce government subsidies as reasons for the upgrade.  

Going ahead, the focus of the market near-term will be on the Fed’s move, developments related to Brexit, snap elections in Germany as well as the oil prices. The Opec’s move to tighten global supplies may continue to keep oil prices on an uptrend. Domestically, the market is likely to focus on the outcome of Gujarat and Himachal Pradesh elections as it is likely to test the popularity of the existing government. RBI policy is also to be watched out, although rising crude prices leave very little room for rate cuts.

Kotak Securities said it expects the government to put bank recapitalisation and infrastructure spending on the fast track, going forward. “Benchmark indices are currently trading at around 19x FY19 consensus estimates. Valu-ations continue to remain at higher levels for the domestic market and hence we believe that earnings revival is absolutely critical for such rich valuations to sustain. We expect earnings recovery to start kicking in coming quarters with PSU bank recapitalisation and Insolvency Act underway, improvement in infra capex as well as benefit of low base of earnings for H2FY18.”

It further said, “At this juncture, our preference is for companies that have room for further expansion in valuations and improving earnings trajectory. We like stocks in infrastructure (roads and building segment focused EPC companies), Metals (aluminium players), potential healthy dividend paying cash rich PSU companies, Urban infrastructure (Smart meters and Namami Gange) and Defence (make in India).  Key risks to our recommendation would come from adverse outcome of Gujarat elections, geopolitical concerns globally, decline in liquidity from FIIs and domestic mutual funds, sharp currency movements and a spike in oil prices.”

Such optimism, however, is tempered by the stress witnessed in the macroeconomic environment of late. Inflation has been on the rise, fiscal slippage looks possible now and maybe, trade deficit could widen given the strengthening crude oil prices. 

Atul Kumar, head-equities, Quantum AMC, said, “All the Indian listed companies completed announcement of quarterly results for the first half of fiscal 2018. Companies’ profitability is on an uptrend and growth witnessed is likely to continue. This comes after a few years of stagnant corporate profits. However, stock market participants continue to remain overly optimistic. Their estimate of approximately 20 per cent earnings growth of BSE Sensex companies for fiscal 2018 is unlikely to be met. So far, the investment cycle has not taken off, contrary to long held expectations. It is likely that capex cycle picks up in coming months supported by higher demand.”

Still, on balance, there are more positives to look forward in 2018 than in 2017.


Ashwin J Punnen