The
next issue of Morning Trekk will be published on 4th October 2017.
Thought for the day
"Injustice in the end
produces independence."
—Voltaire (French 1694-1778)
Word for the day
Monticule (n)
A small mountain, hill or
mound
Malice towards none
The court says, "a
feeble No does not mean No."
We may need a Pink 2.
#MahmoodFarooqui
First random thought this morning
After NITI Aayog, the government has constituted another
unaccountable body to advise it on economic matters. This is a pure advisory
body and cannot be held accountable for any of its advice given to the
government.
The point is that why do we need such a body. PM could have called
all these eminent economists, and many more, to meet over tea every month and
give their suggestions regarding economic challenges being faced by the
government. They would have been happy to offer their advice/suggestion without
any charge to the exchequer. CEA and PEA could then process these suggestions
and do the needful.
What could cause a bear market - 2
Most analysts and money managers apparently seem convinced that
the market may not fall much from the current levels. In their view, though
fully priced at this point in time may rise much higher as earnings are likely
to grow much faster from FY19 onwards as the effect of demonetization and GST
fade and benefits start to kick in.
Before I make any argument, I would like to state a few facts
which are not disputed by many.
(a) Sensex earnings have
hardly seen any growth in three years from FY15 to FY17. In this period Sensex
earnings have grown just 5% from 1329 in FY14 to 1397 in FY17.
(b) The long term EPS
growth (5yr CAGR) has been declined from 25% in FY08 to 5% in FY17. Even
considering the consensus estimates, the long term EPS growth may remain around
5% level in FY 18 and FY19 also.
(c) One year forward PE of
Sensex, based on consensus estimates, is close to 19, which compares well with
2008 peak of 20.
(d) Market capitalization
to GDP ratio, a key macro matrix applied to assess the sustainable levels of
equity market, of Indian markets is about to 90%, which is close to 100% level
seen in 2010. The recent peak in this ratio was seen in 2008, when this ratio
was close to 150%.
(e) Sensex price to book
ratio is close to its long term average of 3x.
(f) In past one year
domestic flows to equities have increased materially in comparison to period
after GFC. However, Foreign investors have net sold position in Indian equities
in 2017.
(g) The aggregate capacity
utilization at economy level is below 75% consistently.
(h) Both private investment
and private savings rates have declined in past three years.
Besides the above, the view is divided on the following issues:
(i) Earning recovery is
imminent as GDP revives from FY19 onwards
(ii) The capacity
utilization shall improve as the impact of demonetization & GST related
slowdown fades and demand bottoms out.
(iii) Indian rates may ease
further from here.
(iv) India's macro
fundamentals are resilient to any global economic slowdown liquidity
contraction as Central Banks wind up post GFC stimulus.
(v) US yields and USD may
move higher from current levels, pressurizing flows to emerging markets,
including India, and correction in global commodity prices.
In my view, the future course of Indian equity market would depend
on these factors. We need to find what could take market up or down in
2018....to continue.
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