In our view, the required building blocks for India’s economic growth related to demographics and potential in infrastructure are intact. Structural policy reforms (GST, IBC and RERA), some of which, while disruptive in the short term, are expected to be beneficial in the medium to long term. The focus on digitization augurs well for overall productivity in the economy.
From a corporate earnings point of view, consensus earnings growth is currently pegged at ~21% CAGR from FY20 to FY22, implying P/E of 17.6x on FY21E. We believe that the market’s valuations are reasonable as “earnings” is low compared to long term averages, given that the PAT (Profit after Tax)/GDP at 2.5% is at 15-year low. We remain positive on the market given the likely improvement in earnings growth, and low interest rate.
Highlights from the 2020 India Market Outlook:
GDP Growth: India had a volatile 2019 with GDP growth seeing a steady slowdown. Slowing global economic growth, falling trade intensity, and uncertainty over the US-China trade conflict are posing obstacles.
Indian Rupee (INR): INR depreciation has been relatively lower as compared to the previous calendar year where it had depreciated by ~8.7%. The INR’s fall should be seen in context of the performance of other emerging
CPI Inflation and RBI Policy: CPI Inflation was 2.05% at the start of 2019, much below the RBI medium-term target of 4%. However, by the end of the year it rose sharply to 5.54% (Nov’19), propelled by a surge in food prices, which compelled the Central Bank to take a pause and hold rates in the December policy.
Debt Market: Even though 2019 started on a rather unpromising note for fixed income markets with sustained credit freeze post ILFS default, with a hawkish Fed, concerns on breach of fiscal deficit and slowing growth, the year turned out to be great for fixed income investors with interest rates falling significantly during the year, rendering debt fund investors a rather happy lot.
Equity Market: The 2019 narrative shifted from global concerns to India election and eventually cyclical slowdown in the domestic economy in 2HCY19. In the backdrop of moderating economic environment, headline indices witnessed divergent returns trend. While the BSE Sensex and Nifty indices were up 12% and 10% CY19, BSE Midcap and BSE Small cap indices were down 5% and 10% respectively.