Equity market offers little spark in the short term

After gaining 23 per cent year-to-date till July, the Indian equity market is likely to struggle upwards, going ahead. Both time and price corrections are also not ruled out due to high valuation, disappointing corporate performance, and weak outlook of corporate capex recovery.

Benchmark index Nifty 50 has already declined 2.4 per cent after hitting a new record at 10137.85 on August 2.

The Indian equity market looks expensive at 21 times FY18 estimated earnings, brokerages said. Bank of America Merrill Lynch remains cautious due to high valuation and has a Sensex target of 30,000 for December, which implies a 5.5 per cent downside, from Wednesday’s closing of 31,770.89.

Kotak Institutional Equities pointed out that underlying conditions in several sectors, such as banks, information technology and pharmaceuticals and the broader economy continue to be weak given the performance of India Inc in Q1. It expects Nifty 50’s earnings to grow only 1.5 per cent in FY18 after it reported 8.4 per cent year-on-year decline in Q1 and downgrades are expected in several sectors such as banks, metals & mining and pharmaceuticals. There is little evidence of a strong turnaround in the economy, which can drive volume growth,” it said.

Deutsche Bank had earlier said that almost 40 per cent of its coverage companies have disappointed in the June 2017 quarter and only 26 per cent surprised positively. “Micro factors are not as favourable as macro,” it said.

There is also weak outlook on pick-up in private corporate capex given poor industrial utilisation, according to Bank of America Merrill Lynch.

Government spending is also expected to be limited as the fiscal deficit reached 81 per cent of FY18 target in Q1, compared to 61 per cent in the same quarter last year, and there is uncertainty over indirect tax collections post GST.

Markets are slaves of earnings growth, which, in turn, is driven by good financial performance and pick-up in corporate capex.