Q1FY18 earnings a disappointment but equities still best investment bet

The latest earnings season (first quarter of the financial year 2018 - Q1FY18) was a disappointment. The results suggest that the underlying conditions in several sectors and the broader economy continue to be weak. Q1FY18 net profits of the Nifty-50 Index declined by about 10% Y-o-Y, much worse than consensus expectations. There have been downgrades in full year expectations for FY18 post first quarter results, but we believe that the expectations are still elevated. 

Overall earnings growth in 1QFY18 was muted due to GST-related destocking and discounts in a couple of consumption related sectors and export/global oriented businesses continuing with the sluggish trend. 

While the former concern will largely get addressed in the current quarter, the latter seems a medium to long-term structural headwind. However, the pace of money flowing into the equity market has been faster than the pace of corporate earnings growth, thus leading to stretched valuations. Given the recent downgrade in earnings expectations, the current overall valuations seem to be stretched from a short-term perspective. 

Given this, we advise investors to take a staggered and disciplined approach while investing in equities, rather than chasing the momentum blindly. We expect equities to provide healthy returns in the long term. It still remains to be one of the best asset classes to invest in, given issues surrounding physical assets and expectations of moderate fixed income returns. 

However, as volatility is inherent to equity investing. Investors should also be prepared to withstand any volatility in the short term. Globally, there have been a couple of geopolitical flash points, which could adversely affect sentiments towards risky assets if the tension escalates. Further, on the domestic front, if the expected earnings growth recovery does not materialise or gets delayed further then there could be downward pressure on the market.

The author is CIO- Equity, Kotak Mutual Fund. Views expressed are personal and belong solely to the author. They do not reflect the view(s) of Business Standard. Business Standard shall not be liable for any liability whatsoever for the same.