Recent policy measures such as the steps taken to revive the slump in the auto sector, government’s plan to merge select public sector banks (PSBs), rollback of the surcharge on foreign portfolio investors (FPIs) proposed in the Budget, transfer of nearly Rs 1.76 trillion by the Reserve Bank of India (RBI) to the government’s coffers amid a slowing economy and falling consumption have failed to rekindle ‘animal spirits’ in the markets.
Most brokerages, too, have been cautiously reviewing the situation and do not seem to be in a hurry to change their outlook for the economy and markets. Their cautious stance on the road ahead for the markets stems from the outlook for corporate earnings, which they believe, will take a long time to revive despite the measures being undertaken by policymakers.
While revising their March 2020 target for the Nifty50 to 11,800 from 12,900 as envisaged earlier, Nomura, for instance, cautioned against possible cuts to corporate earnings estimates going ahead. Consensus, according to them, had projected Nifty earnings growth at 14 per cent/19 per cent for FY20/21. Nomura does not rule out the possibility of a 3 – 4 per cent cut to these estimates on account of the ongoing slowdown.
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“The ongoing slowdown in economic growth and the GDP print for the June 2019 quarter being lower than even the most bearish estimate will be a cause of concern for market participants, in our view. The corporate earnings for the first quarter of financial year 2019-20 (Q1FY20) are a reflection of the broader economic slowdown,” wrote Saion Mukherjee, managing director and head of India equity research at Nomura in a recent co-authored report with Neelotpal Sahu.
As regards economic recovery, Nomura expects a pick-up only in the second half of FY20 (H2FY20) when the impact of the recent measures plays out. That’s said, it believes the revenue targets for FY20 for the central government as presented in the Budget will not be met on account of the economic slowdown. Assuming the state expenditure target is maintained, the additional surplus from RBI, Nomura says, will likely help in just maintaining the fiscal deficit target, providing no room for any significant stimulus.
Since the presentation of the Budget in July, markets have mostly been a one-way street with the Nifty50 slipping over 8 per cent. Nifty PSU Bank, Nifty Metal and Nifty Auto have been among the worst performing indexes that lost around 13 per cent to 25 per cent during this period.
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Analysts at Jefferies, too, are of the view that the transfer by the RBI to government may only serve to plug revenue slippages. While cautioning against the risk to the Rs 1.05 trillion divestment target, they suggest a 15 basis point (bps) slippage looks likely.
They have lowered the FY20 earnings estimates by 9 per cent (for the universe of companies they track) and for the Nifty by 8 per cent with cuts across the board, especially in financials, autos and materials. That said, Jefferies also cautions against the expensive valuation of the Indian markets. They remain overweight on financials, industrials and technology sectors and have cut exposure to the discretionary segment, consumer staples, materials and utilities.
“Valuations are no less expensive with the MSCI India still at 17.5x 12M forward P/E and at 21x trailing – well above post global financial crisis (GFC) averages - and at a 35 – 40 per cent premium to emerging market (EM) averages, too. We remain defensive with a bias for large-caps over mid-caps, which are no longer at a premium unlike in the last two years but not cheap either,” wrote Somshankar Sinha, managing director and head of equity research for India at Jefferies in a recent co-authored report.