Market at record highs; more gain likely ahead, say analysts
STOCK TAKING Economic recovery, earnings to aid rally; pricing woes unlikely
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, from 10,000 earlier, after raising corporate earnings estimates of 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.
Last week, Morgan Stanley set a Sensex target of 34,000 points for June 2018, citing an improved corporate earnings outlook and strong economic growth as reasons for the prediction.
Earlier, Citigroup set a March 2018 target for 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 Nifty Sensex 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 one-year forward price to earnings (P/E), at a 27.19% premium to its five-year historical average. Compared to key emerging market and Asian peers, the premium is the second highest after China’s Shanghai Composite Index which trades at 10.75 times one-year forward P/E, which is 29.49% premium to its five-year average.
The Sensex also trades at a premium of 47.32% and 39.02%, respectively to MSCI EM Index and 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 eatio of Indian markets is one standard deviation above its 10-year average PE, hence caution is advisable; however, 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 PE ratios. From another dimension, if the net inflow to Indian stock market continue at current pace of approx. $5 billion a year, the valuation would be sustained.”
A few, however expressed their discomfort with surging valuations, and felt they were in the expensive zone.
“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 euros of emerging market assets. “Many positive things have happened this year, for example state elections, budget and GST . So the question is - what next?” Alava said in an e-mailed response to queries from Helsinki.
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. “My view is a bit less bullish than earlier this year, when India was my favourite market.”