We’re Likely to End Coming Year with Earnings Growth of 12-15%
Harsha Upadhyay, CIO, Kotak Mutual Funds
May 04, 2018 | Source: Economic Times
The market is in a consolidation phase. Strong domestic liquidity continues to support the market, but you also have growing macro challenges, rising interest rates across the globe and corporate earnings which are not so great yet. Given these conditions, though the markets have inched up, they will move in a narrow range, unless there is clarity on how earnings will pan out. In addition, going forward, we are moving closer to general elections and market could well be driven by expectations on the political front.
It is difficult to predict headline earnings at this point of time. Most of the analyst estimates point to a range of 22-25% earnings growth for Nifty basket in FY19. It is also true that around 50% incremental growth in FY19 over FY18 will be contributed by banking sector, which includes the public sector banks and some of the corporate-facing private banks. Predicting earnings has become very difficult given how the NPA situation has evolved and also the February circular by RBI which makes provisioning level in banking system go up in next six months or so. If I were to make a guess, I think we would end the coming year again at 12-15% earnings growth.
What returns should investors expect? To an extent, the market has witnessed a time-wise correction by moving in a narrow band over the past six to nine months. But even after recent sideways movement, the market is still trading above its historical averages. In such a scenario, finding too much value is anyways difficult. Optically, value seems to have emerged in beaten-down sectors where there are multiple fundamental concerns and headwinds today. However, external triggers are required in these pockets to witness upside in stock prices. Taking a bet there would be like taking a bet on an external trigger, which may or may not happen. Hence, following a complete value strategy may not work. Given this, we continue to focus on growth at reasonable price.
From a three- to five-year perspective, stock market returns may grow in line with earnings growth. I think low double-digit to mid teens kind of CAGR returns are possible given current valuations and where we are in the earnings cycle.
IT Sector, Have things changed in the space? There seems to be better commentary from IT companies in the past couple of months. The deal pipeline seems to be getting better except in the BFSI vertical. The growth rates have not sharply changed but that steadiness and expectations of incremental improvement have helped investors deploy some money here.
Pharma Sector: It is difficult to take a position on Pharma sector as a whole. It is futile to predict the timing or outcome of regulatory approvals which are so critical for regaining future profitability, especially for US generics. We are adopting a very stock specific approach in this sector.
Oil prices continue to edge higher. Is that worrying? High oil prices will fuel retail inflation and lead to a rise in current-account deficit (CAD) as well. CAD could go to 2.25-2.5% of the GDP this year. Incrementally, it is worsening as compared to the levels of previous years. Higher crude prices also mean lower corporate profitability with a lag. These are the negatives we are closely watching.