No earnings upgrade for now
Adrian Mowat, Chief Asian & Emerging Market Strategist at JP Morgan, recently spoke to CNBC-TV18 about his view on Indian equities (INDY).
Asked about forecasts for earnings growth in India, he said that the firm is not changing them for now. Providing a reason for the same, he said that the companies from the healthcare and information technology sectors will find it difficult to grow earnings “because of some of the US administration’s policies with regards to trade and outsourcing as well as their attack on the price of pharmaceutical products in the United States.”
The consumer staples sector is expected to witness “its normal steady growth,” thus reducing the possibility that earnings from the sector will be upwardly revised.
Meanwhile, the upcoming implementation of the goods and service tax (GST) may have an impact on the stocking situation of companies in the consumer discretionary space. Consumer discretionary firms may prefer to reduce their stock ahead of the GST in order to reduce tax implications. This makes the firm unsure about the financial prospects of companies in this sector.
Valuations are higher
Mowat expressed some concern on the higher valuation of cyclical sectors in India compared to the past and vis-a-vis other emerging markets.
A cyclical sector is one whose performance has a high correlation with the business cycle. An upturn in the corporate profit cycle makes cyclicals appealing. Automobiles, airlines, and hotels are examples of cyclical stocks.
Mowat said that “the broader EM index is forecast to deliver around 16 percent earnings per share (EPS) growth this year.” Thus, unlike the 2011-15 period, where earnings growth was scarce and India did well because of its fundamentals, emerging markets in general are expected to see a rise in earnings in 2017.
Given increased valuations of cyclicals, India may see some pressure on investment inflows given that it seems to be on par with other emerging markets.