Widespread optimism even markets hit record highs

Economic recovery, earnings to aid rally; pricing woes unlikely

MUMBAI: Most analysts and fund managers are optimistic about the prospects of Indian stocks even as they hover near record highs, citing hopes of a recovery in economic and earnings growth.

Goldman Sachs Group Inc. raised its Nifty 12-month target on Friday to 10,400 points from 10,000 earlier, after raising earnings estimates for Indian companies.

“Based on the 4Q earnings’ trends, improving activity and our increased confidence in corporate earnings recovery, we raise our CY17/18 earnings growth estimates by 2-3 percentage points,” Goldman Sachs analysts Nitin Chanduka, Sunil Koul and Timothy Moe said in a note. “We expect earnings to grow 14% this year and 18% next year.”

On June 6, BSE’s 30-share Sensex touched a record high of 31,430.32 points, while National Stock Exchange’s 50-share Nifty scaled a record high of 9,709.30. Since then, they are down 0.54% and 0.42%, respectively.

Earlier last week, Morgan Stanley set a Sensex target of 34,000 points for June 2018, citing an improved earnings outlook and strong economic growth as reasons for the prediction.

Recently, Citigroup set a March 2018 target for the Sensex at 32,200 points. The brokerage, however, said a lot of positives were priced in, and cut its Nifty fiscal year 2018 earnings growth expectations to 15% from 18% at the start of the earnings season.

On the other hand, Goldman Sachs noted that most companies are seeing recovery in demand to pre-demonetisation levels.

According to their analysts, capex-sensitive firms continue to see increasing opportunities from the government push on infrastructure while consumersensitive companies expect rural demand to pick up. The analysts added that firms also remain optimistic about the government’s thrust on affordable housing to boost demand.

As far as valuations are concerned, the Sensex trades at nearly 19 times the one-year forward price-to-earnings ratio (P/ E), at a 27.19% premium to its fiveyear historical average. Compared to its key emerging market and Asian peers, the premium is the second highest after China’s Shanghai Composite Index, which trades at 13.92 times oneyear forward P/E, a 29.49% premium to its five-year average.

The Sensex also trades at a premium of 47.32% and 39.02%, respectively, to the MSCI EM Index and the MSCI Asia-Pacific ex-Japan Index, which are trading at 12.89 times and 13.66 times one-year forward P/E, respectively.

“As the price-to-earnings ratio of Indian markets is one standard deviation above its 10-year average PE, caution is advisable; however, the valuations are not alarming,” said Singapore-based Sanjay Guglani, chief investment officer at Silverdale Funds.

“Low interest costs have pushed down the cost of capital, which has in turn pushed up P/E ratios. From another dimension, if the net inflow to Indian stock market continues at the current pace of approximately $5 billion a year, the valuation would be sustained,” said Guglani.

A few, however expressed their discomfort with the surging valuations.

“My short-term view is relatively neutral, because valuations look relatively high and I don’t see any immediate triggers,” said Hertta Alava, director of emerging market funds at FIM Asset Management Ltd, which manages around €350 million of emerging market assets.

“Many positive things have already happened this year, for example state elections, budget and GST (goods and services tax). So the question is, what next?” Alava replied from Helsinki in response to emailed questions.

While Alava’s long-term view on India is still very positive, Indian stocks are unlikely to outperform other emerging markets in the short term, according to her.