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2018 started on a strong note but the momentum soon fizzled out after the Union Budget was largely weighed down by global, domestic and political factors. The first six months of 2018 was like a roller coaster ride for Indian markets. The next six are unlikely to be any different, but one thing which provides comfort is earnings growth, which could hit the double-digit market in the next two financial years.
The risk for the market remains more on the downside than on the upside, Mahesh Nandurkar, India Strategist, CLSA, said in an interview to CNBC-TV18. “In the next 12 months, one factor which will be crucial would be tightening by the US Federal Reserve with the European Central Bank not far behind. Global liquidity getting tightened will have an impact on equity markets not just in India but across the globe, especially emerging market equities. Hence, valuation will play a key role.”
From the risk-reward perspective, higher valuations and tightening of global liquidity will have an impact on equity markets, suggest Nandurkar. “From a valuation perspective, the India market is trading at 17-17.5 times forward earnings, a premium of 20 percent compared to its historical averages.”
Even though the multiple remains high for the Indian market, CLSA is confident of strong economic recovery in the next two financial years. “We are building a reasonable 20 percent earnings growth in FY19 and FY20 which is the source of optimism from a bottom-up perspective. The earnings downgrade trend has not ended as yet, as even in the March quarter results we saw some downgrades. In FY19, there is still a risk to the downside in certain sectors,” he stated.
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