Global fund managers pessimistic on earnings

Only a third of 200 investors surveyed think corporate profit will improve over the next 12 months

In what could spell trouble for the equity market, a global survey of fund managers conducted by Bank of America Merrill Lynch (BAML) shows a sharp deterioration in the corporate earnings outlook.
 
Done this month, it found only a third of the 200 investors surveyed think corporate profit will improve over the next 12 months. The reading is the lowest since November 2015, down eight percentage points since last month and 25 percentage points from January.
 
“Investors’ expectations of corporate profit have taken an ominous turn, a warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones. Further deterioration is likely to cause risk-off trades,” said Michael Hartnett, chief investment strategist, BAML.
 
The number of respondents saying equity markets were overvalued rose to a record high of 46 per cent.
 
The investors surveyed think a policy mistake by the US Federal Reserve or the European Central Bank and a crash in global bond markets are the top two biggest tail-risks for the market.
 

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It also showed average cash levels in many global portfolios continued to remain high at 4.9 per cent, compared to the 10-year average of 4.5 per cent. Most investors don’t see much of an impact of the US Fed balance sheet reduction in 2017. Only 31 per cent think any decrease would be a risk-off event, pushing bond yields higher and equities lower.
 
Home caution
 
As for India, the weak June quarter earnings by domestic companies has “set the tone for another weak year”, goes a note from Kotak Institutional Equities.
 
It says the June quarter results, the first one in 2017-18, “suggest the underlying conditions in several sectors and the broader economy continue to be weak. First quarter net profit of the Nifty 50 Index declined 8.4 per cent year-on-year, 1.8 per cent lower versus expectations. We now expect FY18 net profit of the Nifty 50 to grow 1.5 per cent. In the context of persistent disappointment in earnings, we find the market’s faith in valuations and the Street’s ability to value stocks on FY19/20 earnings remarkable,” said the note.
 
After the March quarter results,, the consensus earnings growth estimate for Nifty companies was around 18 per cent.