Stock Markets Seek Capital Investments To Spur Earnings
The stock markets are scaling new peaks, thanks to the strong domestic inflows. But an area where the marketmen are eagerly awaiting a revival is in the corporate earnings. Earnings growth for the last few years has been in low single digits, which is still abysmally low. Over the past few years, actual earnings of the Nifty have been undershooting the expected earnings by a long mile.
Consumption-led sectors such as autos, financials, etc, are the key drivers of corporate profits. But that has not been enough to move the earnings needle as sectors like infrastructure, telecom, healthcare, etc have been dragging down corporate profits.
Marketmen now expect the government to play a major role in reviving the infrastructure sector, which will boost jobs growth and which can in turn have a beneficial impact on earnings growth.
The popular PE yardstick, however, has been rising because of the strong inflows into the stock market from domestic investors. The forward PE ratio, an indicator of how expensive the stock market is in relation to its expected earnings, currently hovers around the 19.5 times mark. Historically, forward PEs averaged at 15.8 times. This suggests that the markets are overvalued.
Earnings growth has been elusive and sectors like telecom, health care, consumer staples, and financials are now even seeing downgrades because of the lack of demand. Marketmen also reckon that a braod-based expectation of a revival in infrastructure sector has been elusive. However, sectors like materials, metals, energy and consumption are seeing a better earnings trajectory.
Still, marketmen expect the government to play a major role in reviving the infrastructure segment, particularly after the demonitisation and GST de-stocking that has taken place. Industrial production has languished last month, declining by 0.1 percent in Jun 17. Consumption activity has been on the decline since demonitisation.
A pick-up in government expenditure has not yet had a material impact on investment activity. Now what the Indian market needs is a broad-based revival in investment activity. Corporates are not yet venturing out and increasing capacities because of a sluggish demand scenario. The credit growth in the economy has remained at low single digits, suggesting that corporates are shying away from the debt market.
An increase in government spending towards infrastructure and rural development can have a multiplier effect on jobs growth and also boost the demand for materials, metals, etc. The rural economy has also been impacted due to loan waivers, among others, and hence a boost in rural capital expenditures is being seen as benefiting the rural incomes.
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