Mumbai: Global financial service firm Bank of America Merrill Lynch (BofAML) ruled out the possibility of any major upside for the Indian markets from the current level arguing that the corporate earnings growth is unlikely to beat street expectation.
“A narrative common in India nowadays though is that a revival in earnings growth will help the market deliver returns despite elevated multiples. We believe this is unlikely,” said analysts at BofAML.
It expects Sensex to touch 32,000 by the end of 2018, a 9 per cent discount from its current level.
On Wednesday, Sensex closed the session at 35,176.42 while the broader 50-share Nifty ended the day at 10,718.05.
The firm pointed out that the higher stock returns in the past were mainly due to earnings growth exceeding street expectation.
“This is where Indian equities hit a hurdle. FY19 earnings expectations for the market are relatively aggressive. For almost 70 per cent of the BSE-200 stocks, consensus forecasts FY19 profit after tax (PAT) growth at higher than the CAGR of the last three years. For about 35 per cent of stocks, consensus forecasts PAT growth higher than each of FY16/17/18. Relatively high forecasts suggest the probability of earnings beat is low; that we believe should limit stock return in the near term,” BofAML added.
India has under-performed emerging markets in 2018 till date as macro factors like higher crude oil price along with concern regarding trade war and slew of bank fraud cases back home impacted investor sentiments.
Citing improvement in cement demand, electricity consumption, retail lending and rural consumption, BofAML said consumer-focused businesses dominate the screen of those with elevated expectations.
However, it said macro factors are likely to dominate sentiments in the near term as higher oil prices are hurting twin deficits while political uncertainties will increase going into 2019.
