Focus on earning after market boom

Two factors have aided the sentiment. The much-awaited monetary policy normalization by the US Federal Reserve has begun. For the first time since 2018, the US central bank has raised interest rates by 25 basis points to counter rising retail inflation. One basis point is 0.01%. Second, there were hopes that the Russo-Ukraine conflict was nearing its end, although so far there are no signs of a ceasefire. For India, it helped that Brent crude oil prices fell 4% last week to $111/barrel, significantly cooling off the $130/barrel seen since the start of the war.

Given this, local growth, especially growth in corporate earnings, is again seen as a major trigger for Indian stocks.

“Now that there are some signs of a Russia-Ukraine conflict and Brent crude has eased, the focus of the Indian markets has shifted back to corporate earnings. Comments on margins, price growth and demand outlook are important. If India Inc. It poses a significant risk if the company’s earnings fails to clock a three-year CAGR of 15-18% in FY13,” said Sahil Kapoor, head of products and market strategist at DSP Investment Managers. CAGR compounded annual growth. is the rate.

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Inflation is a major threat. Hitesh Jain, Principal Analyst, Yes Securities Ltd. said, “Prior to the Russia-Ukraine conflict, there was a widespread expectation among Indian equity market participants that inflation would peak by June, which would aid margins. The outlook for inflation now is quite high. That has changed. While income growth is significant, the difference is, inflation has become a headwind.”

Therefore, Jain cautions that the FY13 consensus expectation for EPS (earnings per share) growth of 18-20% for Nifty 50 companies may be lower, depending on the upcoming earnings season. how about.

Higher commodity prices due to rising raw material costs have posed a threat to the profit margins of companies. Moreover, the Indian rupee has depreciated by about 2% against the dollar so far in 2022.

“The deterioration in the external position this year means that the risks are shifting towards the weakness of the rupee,” economists at Capital Economics Ltd said in a March 17 report.

High oil price and weak rupee is bad news for India’s macros. While some of this pressure on India’s current account position is already contained, the gloom could pave the way for further downside. These factors and costly valuations have weakened the sentiment towards India, leading to continued selling by foreign institutional investors.

However, domestic investors have absorbed the pressure to some extent, preventing a steep fall in the benchmark indices.

Bloomberg data shows that after the recent correction, the MSCI India Index is trading at 21 times the one-year forward price-to-earnings (PE). The MSCI Asia Ex-Japan and MSCI World indices are trading at a discount, with the PE multiplier being 11x and 16x respectively. While India’s valuations have softened given the after-effects of oil and the rupee, they are still above the comfort zone.

It remains to be seen how the Russia-Ukraine situation develops, particularly with respect to sanctions, which will be a key variable to the outlook for the global crude oil price.