Though global brokerage firm BNP Paribas is neutral on India — cautious about corporate earnings and politics-induced volatility — it has set a year-end target of 40,000 for 2019 for the BSE Sensex.

Similarly, CLSA, another global investment advisory major, said there is no compelling reason to turn bullish on Indian equities just yet, even as possible easing of trade tensions between the US and China is probably taking the Indian markets higher.

According to BNP Parbias, India presents a somewhat surprising combination of improving macro-economy and a pedestrian corporate earnings environment. “Notwithstanding the recent disappointing GDP growth print (7.1 per cent in July-September 2018), the broad direction of growth has been resolutely upwards since the mid-2017 trough.”

India’s valuations also leave little room for error. Sensex P/BV multiples are in line with long-term average, but they didn’t decline with the decline in ROE over the past six years, so it would be unrealistic to expect a re-rating as ROEs recover, the report further added.

Eluding recovery

BNP Parbias had a Sensex target of 37,500 for 2018-end.

The much-awaited earnings growth recovery has eluded India for several years, with an average through-the-year earnings downgrade of 9 percentage points from FY11, said CLSA. The economic slowdown over FY11-15 and one-off factors — including demonetisation, NPL clean-up and GST — were the key culprits.

“While downside risk exists for our bottom-up EPS growth forecast of 25 per cent for FY20 due to aggressive margin assumptions, we expect Nifty earnings growth of 18-20 per cent for the year, supported by a turnaround in domestic corporate banks,” said the report, which was authored by Mahesh Nandurkar.

The Nifty still trades at 17x one-year forward EPS estimates and remains 11 per cent higher than the 10-year average and hence, valuation comfort is still lacking, said the CLSA report.

A tale of two halves

BNP Paribas summarises how Asian equities could behave across 2019. “The first half could be volatile, marked by the persistence of the last leg of USD strength aided by the continuation of Fed rate hikes,” it said, and added “we could also encounter a spate of news flows on US-China trade negotiations. Oil price volatility could be higher in H1, exerting pressure on oil importers’ currencies. Finally, General Elections in Thailand (February), Indonesia (April) and India (April-May) could add to the volatility.” In H2 2019, such volatility-inducing events should be largely behind us, BNP Paribas added.

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