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Equity Risk-Reward Analysis - AxisDirect
Abhay Laijawala , Deutsche Equities India
Sep 08, 2017 | Source: Business Standard
Equity Returns Analysis on a Global Scale
Expecting Sensex/Nifty earnings growth of 16% for current fiscal year & 21% over the next
The developing geopolitical scenario: It is a risk that is of low probability, but also one that can’t be overlooked. Consequently, we see equity markets reacting negatively when the war of words intensifies, and then react again once the threat seems to have blown over. We may, unfortunately, see this trend continue, given the significance of the event. Risk assets will sell off and safe havens will move up, as and when the situation appears to be intensifying.
Is it a good time to buy? If the market decline is significant, one should buy on dips. In the near-term, the risk-reward is unfavourable for Indian equities. The market is facing headwinds from accelerated cuts in earnings estimates, elevated valuations, and huge issuance pipeline ahead. Monetary policy normalisations in developed economies are also a risk.
Outlook for foreign flows into India: Foreign institutional investors (FII) were sellers of equities across key emerging markets in August. In India, the amount was relatively higher (around $2 billion). Besides the general risk aversion, India-specific concerns were disappointing quarterly earnings, Doklam standoff, and elevated valuations. While India’s macroeconomic fundamentals stay robust, aggregate demand has been weak and earnings growth lacklustre. The recent quarter saw actual earnings come in below expectations, as well. Coupled with the elevated valuations, we see a high possibility that the threshold of investor patience may be getting stretched. We expect FII inflows to turn volatile until there is clarity on geopolitical risks, tightening global liquidity and a resumption in earnings growth.Any macro data-point suggesting that the visibility of earnings growth resumption is improving can emerge as a very strong catalyst for Indian markets.
Key risks to global financial markets : Key risks to global financial markets include normalisation of developed economies’ monetary policy, especially the US Federal Reserve (US Fed) and the European Central Bank (ECB); geopolitical situation; commodity prices and Chinese growth momentum.
Large-cap segment Vs. mid-and small-cap : While the risk-reward appears favourable for large-caps as compared to the mid-caps, a recovering growth and improving risk appetite environment generally bodes well for stocks in the mid-caps basket. Only from a return perspective, we’d expect mid-caps to yield better returns.
Our December 2017 S&P BSE Sensex target is 29,000. We expect cyclicals to lead the next leg of market rally. Our preferred sectors are consumer discretionary, private banks, energy (of which a large segment of our preference is oil marketing companies), materials and industrials.
What are your estimates for FY18 and FY19 earnings? We expect Sensex/Nifty earnings growth of 16 per cent for the current fiscal year and 21 per cent over the next fiscal year. The GST implementation has been largely non-disruptive and should help higher growth and earnings momentum the next fiscal year.
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