A low double-digit or high single digits earnings growth is likely for indices as select sectors including public sector banks and private banks focusing on corporate lending, continue to drag.
India is being immune to geopolitical risks as it has developed economic resilience over time and it should become more resilient to global shocks as the economy strengthens.
GST impact is going to be company specific. It could be a little bit more on consumption part of the economy. We have seen reasonable amount of impact in the first (April-June) quarter. There is likely to be some more impact in the second (July-September) quarter depending on how the restocking or destocking has happened. Second half (October-March) looks reasonably positive and we will see much better growth in terms of volumes. Demonetization impact as well as GST-related operational issues would be behind us.
This is the second year of decent monsoon. The rural pockets are that much more financially equipped than it was two-three years back. Little bit of pent up as well as discretionary demand has already started picking up, and bulk of the festive season is going to be in the second quarter this year. Bulk of the disappointment in first quarter results came from the index companies which were no way related to GST -public sector banks, one of the big companies in the auto space, and some private sector banks more skewed towards the corporate lending side. Things have not changed for them. So there is a possibility that indices may see low double-digit earnings growth or it may come down to high single digits in FY18.
If there was any global event two three years back which was likely to have any impact on emerging markets, India used to witness higher amount of volatility, both in terms of currency-related fluctuations and also in terms of how the portfolio flows used to impact the country. But since then, it has become less cyclical. Volatility has reduced and impact of any global event which may have a reasonable amount of impact on the emerging market, India seems to be showing thicker resilience. The impact related to anxiety on the geopolitical issue because of North Korea and the US has resulted in some amount of outflows out of India but despite that in the month of August, the market was showing on a month-to-month basis at least some amount of positive returns due to stronger domestic flows. If we get a little bit more strength on the macro-related factors we will sense that this volatility will perhaps reduce more.
The latest GDP slump is not a concerning sign. What we have seen in the last two quarters is a result of perhaps two big policy disruptions in a short span impacting the economy. But from a medium-term or slightly longer term these policy initiatives will result in a stronger economy in terms of income disclosure, higher tax collections, how people should be doing business in the times to come. It only gives me more confidence that in future higher growth number is going to be stickier compared to the volatile figures of growth we have seen in the past. We are looking at 6.5-7% growth again.
Stock prices have run up and the reason perhaps for that is lack of opportunities in the market because growth is getting witnessed in these segments or sub segments of the consumption part of the economy. Our definition of consumption stocks is not just limited to discretionary and staples spend. We look at all good companies on the B2C platform. Also, we are not looking from a shorter duration time frame in terms of staying invested. These companies have displayed robustness of the business model over business cycles. There will be certain corrections happening whenever you see results are not meeting investors' expectations. But these companies still present a reasonable investment opportunity. The benefit of GST is yet to play in terms of market shifts coming from or value migration coming from unorganized sector to organized sector in which these companies play a very significant role.
Insurance companies are popular because of being under-penetrated; the segment will do exceedingly well in times to come. We need to focus on the companies which are driven more from insurance profits or underwriting profits rather than investment related business model.
The Issue with PSU banks is that these banks have to come up with some concrete plan on individual basis and the capital which is getting in has to be channeled more towards growth rather than providing for asset quality. This we have not yet seen. Further, they are losing market share at a faster rate than in the past. It is going to be a more challenging time ahead for PSU banks.