Poor GDP numbers may not hit bull-run in stocks, say experts

In the stock markets, hope never dies. On Thursday, India reported its lowest GDP of 5.7 per cent so far under Narendra Modi but equity players are hopeful that any correction in stock prices would be short-lived. This, when key indices Sensex and Nifty, are trading at historically high valuations.

“The bull-run will continue,” said Shankar Sharma, Vice-Chairman & Joint MD, First Global. “GDP growth in India may not recover for a few more quarters. But stock markets are being driven by low bond yields and they have nothing to do with growth in the current scenario. Hence, any correction in the Indian market would be short-lived. The pattern is similar globally.” The current price-to-earnings ratio of the Sensex and the Nifty at around 25 is comparable only to pre-2008 financial crisis and 2000 tech bubble. Those forecasting double-digit earnings growth for the past three years have had to eat their words every quarter when corporate India reported financial numbers. But the unleashing of record liquidity by global central banks is the chief catalyst for the market rally.

Likely to sustain “Market reaction to poor GDP numbers may not sustain,” said Deven Choksey, Promoter, KR Chokey Investment Managers. “The entire world has borrowed money at near-zero rate of interest in the recent past. All of that liquidity is coming into stocks. That said, India’s GDP could sustain at current levels and only grow from here.”

Choksey said India is emerging from the shock treatment of demonetisation and signs of recovery are now visible in sectors such as cement, auto and capital goods.

Massive fall in India’s manufacturing, industrial and small and medium enterprises activity after demonetisation and change in tax regime hit the economy. Thursday’s data showed manufacturing growth fell to 1.2 per cent from around 10 per cent in July last year.

Recovery under cloud According to Sachchidanand Shukla, Chief Economist, Mahindra & Mahindra, the poor GDP numbers have put a cloud over the earnings recovery. “The weakness in nominal GDP growth in particular will also have implications for earnings growth trajectory. We are at the fag end of the rate cycle with 200 bps rate cut thus far and one more rate cut may not go very far in reviving demand given the twin balance sheet problem,” Shukla said.

According to Sudip Bandyopadhyay, Chairman, Inditrade Capital, no domestic institution in India will sell stocks due to poor GDP. “The selling could chiefly come from foreign funds, which will be absorbed by domestic players,” he said.