Eco Survey 2018: Rise in future earnings needed to sustain stock valuation

The Economic Survey 2017-18 tabled in Parliament on Monday said that "sustaining" current stock valuations in India requires "future earnings performance to rise to meet still high expectations".

According to the Economic Survey 2017-18 presented by the Finance Minister Arun Jaitley, earnings growth will "depend on whether a significant economic rebound is this time well and truly around the corner".

Over the past two fiscals, the Indian stock market has soared, outperforming many other major markets. Since end-December 2015, the S&P BSE Sensex has surged 46 per cent in rupee terms and 52 per cent in US dollar terms.

"Does this imply that Indian P/E (price-earnings ratios) ratios have reached a higher 'new normal'? Perhaps. It's possible that the portfolio shift set in train by the campaign against illicit wealth will result in a sustained reduction in the ERP (equity risk premium)," the survey said.

"...Beyond ERPs, sustaining current stock valuations in India also requires future earnings performance to rise to meet still high expectations. And this outlook, in turn, depends on whether a significant economic rebound is this time well and truly around the corner."

As per the survey, the exponential rise in the stock markets has led to a convergence in the PE ratios of the Indian stock market with that of the US at "a lofty level of about 26".