Equity Outlook: Earnings growth should change for the better

After a robust 31.4 per cent return in 2014, this was a disappointing year, with the Nifty recording a near-five per cent fall. The near-euphoria that fed on itself on the back of a new right-wing majority government in India in 2014 has run its course.

Any meaningful economic turnaround in India is possibly at least two or three quarters away, despite the investment spree by the government in railways, roads, public sector petroleum refineries and efforts at reviving the mining and power industries. Only an uptick in the economy can help public sector banks address their stressed asset and under-capitalisation issues, to be able to finance the next phase of private sector investments in capacity creation. The near-halt to new economic legislation has contributed to the moribund state of the equity market, which was looking forward to speedy implementation of the GST and bankruptcy laws.

What, then, can change in 2016 for equities to deliver the near 16 per cent compounded annual growth rate the Sensex has done for 36 years? For starters, the US economy appears to be on the mend and if the Chinese manage to steady their ship and Europe starts responding to the relentless monetary ballast, the global economy can get back into better shape in at least late 2016. In that case, global investors are likely to take a fresh look at risk and start pumping in money into the more robust emerging markets. India is in a privileged position here, having negotiated the after-effects of the 2008 global meltdown rather well and with an economy growing at a relatively fast pace, government finances in reasonable shape and interest rates continuing to trend downwards. Any pick-up in the global economy can help regain the lost momentum in exports. And, if this ties up with a possible revival in domestic private investment, Indian equity investors can look forward to a good 2016, at least in the second half.

With the sovereign wealth funds of oil-rich countries becoming net dis-savers and terrorism taking the global centre-stage, there can be bouts of pronounced volatility in equities. However, the financial system could successfully channelise the savings generated by falling commodity prices to equities, and with increased vigilance, the scourge of terrorism could well be contained. At the current anaemic earnings growth, it is true that Indian equities do not look very attractive but as we get closer to an imminent economic turnaround, earnings growth expectations will change for the better and are likely to help equities generate reasonable returns for investors.

The author is Director, Dalton Capital Advisors (India)