Indian markets appear expensive, warns BoFA-ML
BoFA-ML says there are hardly any signs of acceleration in corporate earnings, market returns in the near term could be capped
Mumbai: Bank of America-Merrill Lynch (BoFA-ML) warned on Tuesday that Indian markets are looking expensive, as there are hardly any signs of acceleration in corporate earnings, and the returns in the near term could be capped.
“The market appears expensive on most metrics of absolute valuation. Forward P/E (price-to-earnings) of 16.7 times (for Nifty) is close to highs (especially if we ignore the 2014 election rally)," BoFA-ML analysts Sanjay Mookim and Anand Kumar said in a note.
“Earnings growth forecasts haven’t improved. P/B (price-to-book) has similarly expanded while RoE (return on equity) has not," the analysts said pointing that the high market breadth also suggests limited near-term returns.
“Longer term equity growth has to be led by earnings. Unfortunately, there is little sign of earnings acceleration in India," Mookim and Anand said.
On Tuesday, BSE’s 30-share Sensex closed 0.42% lower at 27,976.52 points, while National Stock Exchange’s 50-share Nifty shed 0.52% to close at 8,590.65 points.
BoFA-ML pointed out that profit growth for the larger BSE 500 basket, ex-banks, has slowed from 12% in December to 8% in March, adding Bloomberg forecasts now suggest Nifty PAT (profit after tax) will grow 17.1% in FY17 , down from 20% forecast in January, and these numbers have been continuously downgraded.
The brokerage firm said much of the expectation of growth relies on improvements in cyclicals, which can vary in a wide range.
The earnings revision ratio for the market has improved, with more upgrades than before, but historically, this has significantly lagged market performance, the analysts pointed.
Mookim and Anand argued that there is little reason for a fundamental, positive correlation between hard commodities and the Indian economy, as India is a net importer of many.
“Yet, the phenomenon of flows has created a strong positive correlation between Indian equities and commodities. While that had broken around the time crude started to nosedive, these correlations are now back on," they added.
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