The misfortunes of the Sensex, seen over the course of 2016, are far from over. At least that’s what the data seems to suggest.
India’s benchmark stock market index is on course to witness its lowest valuations since 2011, according to Bloomberg data.
Uncertainties pertaining to the recovery in global commodity prices, the prospect of a tighter US monetary policy fuelling a dollar rally, upside risks to inflation, along with domestic worries are likely to keep a lid on earnings growth going into financial year 2017-18 and financial year 2018-19, according to market participants and brokerages.
The price-to-earnings (P/E) multiple for the blue-chip Sensex is currently around 20 times and is expected to fall to around 15 and 13 times over 2018 and 2019 respectively, according to Bloomberg estimates. This compares with a 10-year average of about 18 times for the benchmark 30-share index.
The P/E ratio compares the current price of an index with the returns of the past 12 months and predicts earnings for the year ahead.
Investors in India continue to worry over the impact of demonetisation of old high-value currency notes. The ensuing cash crunch has resulted in a significant growth slowdown in Asia’s third-largest economy.
“In India, there is a near-term hit to growth from the government’s decision to abolish the existing stock of high-denomination currency notes,” HSBC said.
Data released by the Reserve Bank of India (RBI) showed that as of December 23, bank lending to businesses, individuals and the farm sector was slowest since 2000.
While analysts expect the RBI to cut interest rates next month to support growth, concerns remain on the pace of interest rate cuts amid global growth worries and benign inflation back home.
Reflecting these concerns, Indian stocks saw the biggest outflows among Asian markets in the last quarter. Global funds sold the most rupee-debt in at least five years as the cash ban and higher US interest rates deterred investors.
For flows to stay positive, sustained outperformance along with fundamental improvements, earnings recovery, and credible reforms will be key, market experts said, adding that the trend is likely turning in the favour of developed markets.
HSBC has raised its forecasts for the developed world while in the emerging markets, the revisions are mainly downwards, with the exception of China where the recent run of data have revived growth prospects.
The brokerage believes India’s economic growth would be lower for at least the next two quarters implying “the revival of the investment cycle, which is already very weak, could be pushed out even further”.
Despite all the pessimism, analysts still believe downside for the Indian market remains limited as improving domestic fundamentals coupled with government policy initiatives will keep investors positive on domestic shares.
"Investors are looking for bright spots in the emerging market space and I don’t think anyone can dispute local strength here in terms of macros, be it current account deficit, inflation or foreign exchange reserves. So I think people would want to be overweight on India," Raman of Centrum Wealth Management added.
(This story was first published on BloombergQuint.)
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