Indian markets still hold promise, FY18 earnings may grow 20%

Indian markets were on a roll till September this year. Corporate India was bullish, expecting a good monsoon, lower interest rates and higher disposable incomes from the Seventh Pay Commission to give a fillip to the economy. 

However, three unexpected events in November have altered the landscape in a big way.

The election of Donald Trump as the US President has resulted in flight of capital from emerging markets, given his focus to get companies back to invest in the US. Second, the likelihood of more aggressive interest rate hikes by the US Fed in 2017.

At home, the move to ban high-value notes by Prime Minister Narendra Modi is the third event and has dented earnings growth expectations and sentiment. India’s earnings per share growth for FY17 are projected to be 8.5% for Sensex companies and 12.3% for Nifty firms, continuing the trajectory of disappointing earnings growth over the past few years. Sensex earnings were earlier expected to grow by 14-16%. 

There is a silver lining though. While the economy is expected to struggle for another two quarters, analysts expect earnings in FY18 to grow by more than 20% on the back of normalisation of profits, particularly in sectors such as automobiles and banks. This is among the highest, compared to earnings expectations for major global markets. 

India is also expected to post a higher gross domestic product (GDP) growth than most emerging and developed countries, with Bloomberg consensus estimates of a GDP growth rate of 7.5% for FY18. 

A possible stimulus to boost economic growth and a reduction in the corporate tax rate in the upcoming Union Budget may also bring back the cheer for Indian companies and investors. upcoming Union Budget may also bring back the cheer for Indian companies and investors.

How major equity markets stack up

	Equity Market			Chg in currency	Estimated growth for 2017 in
	Index	Value	Chg (%) *	versus US$ (%) *	EPS (%)	GDP (%)
Brazil	Brazil Ibovespa	60,227	38.9	21.7	27.2	0.8
Thailand	SEI	1,543	19.8	0.5	10.9	3.2
Indonesia	Jakarta Composite	5,297	15.3	2.3	20.0	5.3
Britain	FTSE 100	7,143	14.4	-16.2	17.7	1.2
United States	Dow Jones	19,763	13.4	0.0	11.7	2.2
Taiwan	Taiwan Taiex	9,254	11.0	1.7	12.0	1.9
Mexico	Mexico IPC	45,643	6.2	-17.0	19.5	1.7
South Korea	Kospi	2,026	3.3	-2.6	16.1	2.6
India	Nifty 50	8,186	3.0	-2.6	24.2	7.5
India	S&P BSE Sensex	26,626	1.9	-2.6	24.4	7.5
Japan	Nikkei 225	19,114	0.4	2.6	10.8	1.00
Hong Kong	Hang Seng	22,001	0.4	-0.1	9.8	1.8
Singapore	Straits Times	2,881	-0.1	-2.0	5.0	1.5
Malaysia	FTSE Bursa Malaysia	1,642	-3.0	-4.3	7.7	4.3
South Africa	FTSE/JSE Africa	43,902	-4.1	12.6	28.1	1.1
China	Shanghai SE Composite	3,104	-12.3	-6.5	13.6	6.5
Russia	Micex	2,232.72	26.8	17.8	11.6	1.1
* change is year-on-year
Index value as on December 30, 2016
List sorted on the basis of change in index value
EPS: Earnings per share
GDP: Gross domestic product
India GDP forecasts & EPS estimates are for FY18, rest for the calendar year
Source: Bloomberg
Compiled by BS Research Bureau