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  • Faster earnings could propel Sensex ahead of Dow Jones

    Quote by Rajeev Thakkar in Business Statndard, April 7, 2017

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    Sensex companies' earnings expected to grow by 27 per cent in current calendar year

    The recent rally notwithstanding, the 30-share Sensex is trailing the returns of the US' Dow Jones Industrial Average in dollar terms over three years.

    However, Dalal Street is catching up fast and analysts expect the Sensex to beat the Dow by the end of the calendar year, given the aggressive earnings estimates for Indian markets.

    The Indian benchmark has given a compound annual growth rate (CAGR) of 6.9 per cent in three years, lower than the 8.1 per cent given by the Dow Jones during the period, in constant currency terms.

    According to Bloomberg consensus estimates, underlying earnings per share (EPS) for the Sensex is expected to grow by 27 per cent in 2017 over 2016. During the same period, the Dow Jones underlying EPS is expected to grow by 10.5 per cent on a year-on-year basis.

    This will involve major earnings upgrades for most top stocks in the index, given their lacklustre earnings growth in the recent years.

    The Sensex underlying earnings have grown at only two per cent in the past three years and 5.2 per cent in the last five years. It has been worse in the US, with the Dow underlying earnings contracting at an annualised 0.4 per cent in three years and growing at an annualised 1.1 per cent in the past five years.

    "Earnings growth surprised us on the negative side in the past two years; it is probably right to expect that surprise on the upside is round the corner. This will soon result in a flurry of earnings upgrades. With respect to the mid-cap and small-cap segments, while there might not be any further broad re-rating, the earnings growth trajectory could be far sharper than larger companies," says S Krishna Kumar, chief investment officer, equity, Sundaram Mutual Fund.

    'There is justified optimism in corporate India, given the aggressive downgrades over two years and a favourable base effect, although the Earnings trajectory for the Sensex and Dow Jones sustainability of earnings growth is critical. The fundamentals of Corporate India have also exhibited clear signs of bottoming out - the growth outlook for FY18-19 has improved, additions to financial leverage have slowed and return on equity appears to be bottoming out," wrote analysts led by ICICI Securities chief executive Ravi Sundar Muthukrishnan in their recent India strategy report.

    Brokerages believe that the Indian equity market will trade above the long-term average and a sharp correction in the benchmark indices is unlikely soon, given the likelihood of strong inflow from foreign institutional investors and domestic institutional investors.

    There are indications the economy is recovering. Expansion in the manufacturing purchasing managers’ index (PMI) to 52.7 in March, improvement in the index of industrial production (IIP) in January 2017 to 2.7 per cent year-on-year, improvement in car sales growth in March (12 per cent year on year) and growth in retail finance at 12 per cent yearon-year.

    Dalal Street got support from robust inflows to emerging markets (EMs) in the first quarter of calendar year 2017. The inflows are likely to sustain as the US Fed tempered expectations of front-loading interest rate hikes this year and the correction in the dollar index lured foreign investors towards EM assets, helping the latter's currencies to appreciate.

    The victory of the Bhartiya Janata Party (BJP) in the recent elections in UP and Uttarakhand, with strengthening of rupee, has boosted investor sentiment.

    Others are, however, cautious. "The markets are expected to give moderate returns this year and investors need to adopt a stock-specific approach," said Rajeev Thakkar, CEO, PPFAS, a mutual fund. Among US stocks, new-age tech companies were expected to clock a faster growth rate compared to the rest of the market, he said.

    The original article could be seen here.

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