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Experts surprised by market, say FY20 earnings will be muted but FY21 will be good

For the moment, the momentum will sustain but the rally needs to be spread out, Samir Arora of Helios Capital says.

November 26, 2019 / 12:42 PM IST

The benchmark indices as well as the Bank Nifty touched new highs on November 26 on the hope of earnings growth in FY21 and a possible US-China trade deal in the coming weeks.

The Sensex hit an all-time high of 41,120.28 and the Nifty50 12,132.45, but failed to hold onto the gains and entered into consolidation mood.

The Sensex was up 37.52 points at 40,926.75 and the Nifty fell 1.40 points to 12,072.40 at the time of writing this report.

Experts are largely surprised by the market moves as ground reality in terms of growth is different. The benchmark indices have rallied more than 13 percent from September 19 lows.

"The move in the market is bit surprising and is not corroborated by on-ground data in terms of earnings and economy. The rally was largely due to global risk-on environment, increase in money supply globally, which is moving back to riskier assets like equity," Mahesh Patil, As Co-Chief Investment Officer at Aditya Birla Sun Life Asset Management, told CNBC-TV18.

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The optimism was also due to good inflows from foreign institutional investors (FIIs), he said.

"The market generally rallies when the risk appetite comes in and that is what we are seeing. But, we still see some lack of confidence in the Indian financials market. As once risk money starts pouring in, that (lack of confidence) also eases off and that could pave the kind of base for recovery in the ground level of economy," Patil added.

For the moment, the momentum will sustain, but the rally needs to be broadened, said Samir Arora of Helios Capital, still trying to understand the markets behaviour. The rally, he told CNBC-TV18, has broadened but is not spread out.

The overall trend of quarterly performance doesn't suggest acceleration in earnings and hence earnings growth this year will likely be muted, Patil said.

They were not expecting any big growth in earnings this year, except corporate tax cut which will benefit a few companies.

The story, he said, is more about FY21 because this year factors such as slowdown and the problem with non-banking financial companies (NBFCs) will weigh on earnings.

"Considering the low base of this year and global growth, global linked sectors will see a sharp improvement in earnings next year,” he said. In the Nifty, almost 50 percent of earnings are directly or indirectly linked to global growth.

This year, there is a contraction in global growth but the outlook for the next year is likely to be better, he said.

According to Patil, pharma earnings, which are depressed, could see an improvement and metals, too, could get a leg up.

In the oil and gas space, refining margins have been down this quarter but the International Maritime Organisation foresees a better fourth quarter, which could play out next year. “Hence global cyclicals like oil & gas, metals, or even IT sector, to some extent, could see an improvement," Patil said.

The Indian economy grew 5 percent in the quarter ended June 2019, but experts, taking into account the contraction in the industrial output, expect it to lower further in Q2FY20.

Patil said he expects around 4.5 percent growth for the quarter but that could probably be a bottom. A recovery in the October-December period would drive earnings the next year, he said.

The market is looking beyond the current quarter or two and that is what the current rally could be saying, he said.

He expects rural consumption to pick up, aided by a good rabi crop following a plentiful monsoon.

"While consumption stocks are expensive, we expect the premium to remain. We hold consumer discretionary, retail etc, where growth could be coming back as they are still gaining market share from unorganised sectors," Patil said.

The real estate sector will turn around once interest rates begin to fall. "As the gap between affordability and property prices comes down, we expect absorption of realty will start to pick up," he said.

Most experts say easing of fiscal concerns could be one of the reasons for the rally, especially after the government started focussing on strategic divestment, which can plug the fiscal deficit.

"I believe government should now give up on the fiscal deficit numbers and should now prioritise on issues like BPCL divestment. Fiscal deficit target should be taken as a rolling target not a fixed one," he said.
Sunil Shankar Matkar
first published: Nov 26, 2019 12:42 pm

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