Corporate profits had declined over the past decade to a 15-year low due to factors such as slower economic growth, high leverage, demonetisation and GST implementation.
With the fall in crude prices, stable currency, and steady economic growth, Aditya Birla Sun Life Mutual Fund expects earnings growth of 24 percent for the Nifty (15 percent excluding corporate banks) in FY20.
"Going forward, corporate profits should improve as businesses have adjusted to the policy changes, domestic consumption remains steady, and macro fundamentals are in place," said Mahesh Patil, Chief Investment Officer-equity, Aditya Birla Sun Life Mutual Fund.
He was addressing at an event to discuss Outlook 2019 held in Mumbai on January 10.
The report said that corporate profits had declined over the past decade to a 15-year low due to factors such as slower economic growth, high leverage, implementation of demonetisation and goods and services tax (GST), and non-performing loan (NPLs) in the banking sector.
Patil said that there is a strong correlation between the corporate profits-to-GDP ratio and next five-year earnings.
A low ratio indicates the bottom of the corporate earnings cycles, which is followed by a strong earnings recovery.
Currently, the ratio is less than half of the level in 2007 and is showing signs of having bottomed out.
Patil feels, with valuations of Nifty forward P/E at 17-18x, valuations are reasonable.
According to the fund house, the key risks during the current year are reversal in crude oil prices, escalation of trade war, hard landing in China and general elections in May 2019.
Speaking about foreign flows in to India, Patil feels that FPI outflows are expected to reverse, both in equity and debt.
Going by NSDL data, Foreign Portfolio Investors (FPIs) sold Rs 80,919 crore worth of equities, debt and hybrid instruments in 2018. The equity segment alone accounted for Rs 33,014 crore in outflows, the highest in a decade.
In 2018, rupee depreciated on the back of widening current account deficit due to higher oil prices, interest rate differential with the US Fed hiked rates, impacting foreign flows in to India.
The fund house believes rupee will stabilize in the 69-73 per US dollar band if oil prices remain range-bound. Brent crude oil prices are expected to be range-bound in the range of USD 50-70/bbl.In terms of themes for this year, Aditya Birla Sun Life Mutual Fund is betting big on financials including private banks, corporate banks and select NBFCs (non-banking finance companies) and consumption sectors.Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.