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The macro climate is stabilizing, with the current account deficit, inflation and fiscal deficit seemingly peaking and the worst for GDP growth likely behind us. Yet, share prices have been volatile, up just a tad since December 2012. Arguably, equities were anticipating this positive macro delta at the start of 2013.
Our view is that the earnings trajectory will be better than what consensus is forecasting or what appears to be priced into equities. We see margin expansion, given the steadying investment rate, and a greater fall in the CAD relative to the fiscal deficit as the key earnings driver. We forecast that broad market earnings growth will reach ~20% by end-F2014. Our end-2013 Sensex target implies a further 15% upside, mostly from earnings progression.
Leading indicators are bullish for equities
Of the 27 leading indicators we track, absolute and relative valuations, real rates, our proprietary earnings growth leading indicator, and global liquidity are the most supportive of equities, followed by hesitant sentiment (our market timing indicator) and an improving macro (suggested by the yield curve).
What’s not in favor of equities
The most worrying signals for equities are the high level of FII flows, the market’s apparent complacency about tail risks and upcoming general elections. The biggest positive delta
India Equity Strategy Playbook.pdf
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