After a 15% annualised return for the last 2 years, is there room for more upside in 2018 given that earnings growth is yet to catch up with the pace of equity market returns? One of the factors that kept benchmark indices touching new highs in 2017 was the increased liquidity, both from domestic and overseas investors. Given the low fixed-income yield and lack of performance in physical assets like gold and real estate, domestic investors took to equity investing, especially through regular investments in managed funds.
This consistent liquidity is expected to continue to drive domestic equity markets positively in 2018. According to Sohini Andani, fund manager, SBI Funds Management Ltd, “Along with the quantum of recovery in earnings growth in 2018 and the outlook in 2019, the liquidity situation in both domestic and international capital markets will be important. Another factor to watch out for is rate hikes in the US.” A rising US treasury yield could have the impact of shifting some global liquidity away from India and towards the US dollar and US treasury bonds.
Hope to continue but with caution
Indian equities have seen this hope rally for a few years now, confident that earnings growth will come through sooner rather than later. The latest quarterly earnings (Q2 FY18) does lend fuel to the hope rally as earnings downgrades have slowed down and consensus earnings are being met. Analysts are expecting an average 15-16% earnings growth in 2018 and 2019. Given that the valuation of benchmark NSE Nifty 50 at a forward price-to-earnings multiple of around 20 times is higher than the historical average of around 17-18 times, one has to advocate caution.
Nilesh Shetty, associate fund manager-equity, Quantum Asset Management Co. Pvt. Ltd, said, “In the short term, a further rise in markets from the current level looks difficult as a lot of positive earnings expectations are already priced in.” Market experts are cautious that if earnings growth falls short of expectations for FY18, there could be a meaningful correction. The opportunity for markets lies in meeting earnings growth expectation with little room to falter.
Other than that experts suggest watching out for a rise in commodity prices, inflationary expectations and shortfall in meeting the fiscal deficit target on the back of additional spending announced by the government.