Employment creation is key to sustain consumption growth, says UBS report

Global financial major UBS in a report on Monday said that job creation is a must to sustain the current consumption growth.

Consumption growth in India over the past three to four years has been perceived by investors as resilient, despite a muted macro environment and weaker household disposable income trends, the report said.

Consumption growth, which was healthy in the last few years, was due to these five factors: rising affordability as prices of specific products rose much slower than the CPI; even excluding mortgages, consumers levered up; consumption ‘funded’ through a declining savings ratio for households; marketshare gains for companies before the introduction of GST; and sector-specific, replacement-demand-driven cycles, according to UBS.

It, however, said, the muted household disposable income trends reflect possibly weaker employment trends (quantity, quality, or both) in India, though there is no recent credible data on job creation.

A material expansionary policy (fiscal/monetary), such as the one seen early this decade, or strong global growth seen last decade, is absent and unlikely any time soon. A pick-up in employment is thus needed to sustain/accelerate consumption growth, in our view,” UBS said and added that “our discussions with macro experts and government officials indicated that job creation remains a key focus area, especially going into the 2019 general elections.”

The Indian market is trading near historical highs, at 17x12-month forward PE, of consensus earnings estimates that are likely to see further cuts, UBS said.

“In 2017, a large part of the market returns can be attributed to multiples expansion, rather than earnings growth,” the report added.

The decline in interest rates has not really played a role in the multiples’ expansion. In fact, nominal yields have firmed up recently and this has a negative contribution to market returns. Theoretically, a decline in nominal interest rates (the ‘cost of capital’ argument) may not necessarily imply a higher intrinsic value, because it also implies lower nominal growth (the positive NPV impact of a 1 per cent lower discount rate is offset by the negative impact of 1 per cent lower growth).

Real rates have not declined in India.

Much of the multiples’ expansion in India has thus come from the market building on lower equity risk-premium and/or higher long-term growth.

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