The stock markets in India have been under-going the periodical whipsaw moves in the past 3 months. Extreme bouts of optimism and pessimism indicate indecision on the part of stock pickers and traders. We know the headwinds: macro, misgovernance, money (large foreign inflows yet to flow out), and mood (it's bad).
Risks however do reside in a) industrials (wt: 8% / 5% of growth), rate shocks and/or commodity price drops – but we believe FY12 earnings growth should keep its head above the 15% levels.
Time To Sell Or To Buy? But don't forget the last decade's (and likely tomorrow's) tailwinds – 8%+ GDP growth (after downgrades), 25%+ government revenue growth, relatively safe 15%+ earnings growth (we argue why in this note), more reasonable valuations (now below long-term averages) and under-performance (-19% vs. MSCI-World, - 12% vs. MSCI EM YTD – 35 days actually).
Mood suggests major earnings downgrades — India's earnings revision index is falling, perceived risks to earnings (inflation – margins, rates – interest costs, investment slowdown – growth) are rising, and the confidence in/of corporates is dipping. An unholy mix no doubt, suggesting an earnings slump ahead. The signs though are a little mixed; 3QFY12 earnings have been in line with expectations, the IBES earnings revisions index has dropped sharply, though the narrower Sensex earnings are still relatively stable at 18-19% FY12 growth.
Index Does Not Reflect Reality: We see some earnings downgrade risks, but believe the market is overly pessimistic: a) Sensex composition – 50%+ representation of energy, IT and financials – carries limited risk; b) earnings concentration: top 3 stocks account for 22% of growth, and risks to these earnings look low; c) relative breadth of sectors – 10+ sector account offers diversification.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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