Subdued Samvat 2074 seen as earnings recovery may take time

Samvat 2073 was one an iconic year in the history of Indian equity markets not only due to benchmark indices hitting new all-time highs but also on account of unprecedented events such as demonetisation and implementation of the Goods and Services Tax (GST).

In Samvat 2073 so far, Nifty 50 has ended with gains of 17 per cent, with the broader markets outperforming by up to 5 percentage points. However, Indian equity markets have underperformed global markets as FIIs found other markets relatively more attractive to invest in.

Market experts expect Samvat 2074 to be subdued due to high valuations on the one hand and delay in earnings recovery (now expected only after one-two quarters) on the other.

“Sub-par performance on the corporate earnings front coupled with the rally in the equity markets have taken valuations to almost all-time highs in India,” pointed out Reliance Securities.

Kotak Securities is also concerned with the deterioration in the macro environment. Withdrawal of liquidity by major developed markets (US, Europe), rate hike by the US Federal Reserve (expected) and high valuation of Indian markets will restrict inflows by FIIs, going ahead. If FII selling continues (which has been happening since August) then it may affect domestic flows as returns and sentiment could get impacted. “Local flows have been encouraging so far. However, local flows depend on how markets perform. Flows follow returns, not the other way around. Hence, we will have to track the progress of the flows when markets don’t provide any meaningful return over three-four quarters,” pointed out HDFC Securities in a report.

Nifty has given flat returns since August as FIIs have been consistently selling, but robust domestic flow has saved the situation.

There will be certain sectors, which will be doing well. Anand Rathi continues to believe in domestic growth opportunities while Sharekhan is bullish on companies which will gain from financialisation of household savings, increased government spending and shift to the organised sector. According to HDFC Securities, automobiles and metals will do well, while real estate could turn out to be a dark horse. It expects healthcare to make a comeback. Housing will also continue to be remain a big theme.