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Why earnings recovery will drive next leg of market rally

Indian equities have outperformed most global indices this calendar year so far. Despite this strong run, markets do not appear expensive yet, says Barcalys.

The News International Team

Indian equities have been witnesssing a stellar run from the time pro-business Narendra Modi led-government came to power in May this year. While recent economic push has been a boost for reform-hungry Indian equities, the next leg of market rally will be driven by India Inc’s earnings recovery, says Barclays.

In its recent report, the research firm points out that historically, returns of Indian equities have largely been driven by earnings growth over the past 15 years. Not only the index returns (BSE-100), this holds largely true for most sectors. 

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According to Barclays, most sectors have seen modest earnings upgrades in the last three months with healthcare and consumer discretionary witnessing the highest EPS upgrades and Industrials witnessing EPS downgrades. It expects overall, earnings to grow at 16 percent for FY15E and 17 percent for FY16E.

In contrast to this long-term trend, this year has witnessed a 27 percent return of which 19 percent is due to multiples expansion. While this could be due to raised expectations on the back of change in India’s political leadership, positive earnings momentum is required to sustain these returns, the report adds.

Outlook

Indian equities have outperformed most global indices this calendar year so far – BSE-100 Index has returned 27 percent YTD versus MSCI Emerging Markets at 6 percent and MSCI World at 2 percent. Despite this strong run, markets do not appear expensive yet with the one year forward valuation ratios for the BSE-100 Index at or near its 10-year average level, says the report.

According to Barcalys, continuation of a ‘bull run’ in Indian equities into the next year is strongly contingent on continuing positive bias in earnings revision.

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