Slow and steady

Many of the Sensex companies can grow well this year but global events can hamper returns

The Sensex forecasts for 2017 have been quite sombre, reflecting the mounting uncertainties on both, the global and domestic fronts, for equity investors. Most research outfits are expecting a sedate movement for the Sensex in 2017, with the index reaching the 30,000 mark by the end of the year. In all, they are factoring in returns between 8 and 12 per cent from current levels. This is a departure from the optimism that prevailed in the second half of 2016, when the boost to consumption from a good monsoon, pay commission pay-outs and interest rate cuts had made analysts optimistic about the prospects of Indian stocks. Revival in revenue growth and higher profits had also led to stocks getting marked up last calendar, taking valuation in some sectors to alarming levels.

But the stock price decline since last September has helped remove some froth, making the projected return in Sensex for 2017 largely achievable. Since Sensex constituents are sector leaders and large behemoths, they are mostly insulated from short-term growth hiccups. Unless the Centre delays remonetisation inordinately, leading to severe shrinkage in demand extending over the next two to three quarters, growth in the Sensex’s earnings is expected to be close to 20 per cent in FY18. This is thanks to an expected turnaround in banking stocks once the asset write-offs cease, continuing growth momentum in automobile and pharma stocks, and an improved show by commodity stocks thanks to recovery in commodity prices. If a conservative price earning multiple of 16 is accorded to the one-year forward earnings, the level of 30,000 in the Sensex is well within reach. That said, fundamentals are not the sole determinants of stock price moves. Foreign fund flows that are determined by global events have an overarching influence on Indian equity prices. Donald Trump’s policies could influence the outlook for emerging markets and determine the direction of foreign fund flows. The exit of the UK from the Euro Zone and the Federal Reserve’s further rate hikes can cause upheavals in global markets and influence Indian stock price movements. It has been seen in the past that foreign fund outflows can derail domestic growth-led rallies.

Besides, strong earnings expectation from the Sensex companies cannot be extrapolated to all listed companies. Many beleaguered sectors such as real estate, construction, agri-commodities or textiles are not represented in the Indian benchmark. While companies dependent on domestic consumption have been doing well over the past couple of years, those banking on investment have been in a slump. The Centre needs to revive the investment cycle in the Budget by increasing infrastructure spends and trimming corporate tax rates. A boost to consumption through lower income tax rates and higher social sector spends will help. A speedy roll-out of GST is imperative to improve sentiments.

Published on January 15, 2017
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