"In heaven an angel is
nobody in particular."
—George Bernard Shaw (Irish,
1856-1950)
Word for the day
Propine (v & n)
To offer as a present
Present, Gift
Malice towards none
Why do we and why should we
celebrate a change in date on the night of 31st December?
Besides calendars, what else
changes on this day?
First random thought this morning
First thing in the morning, messages in my WhatsApp inbox make me
feel guilty by convincing me that I am not doing enough for my elders, culture,
religion and the Nation. Then tweets of so called liberals and elites multiply
the guilt by suggesting that in our country caste of a person should be the
supreme criteria for deciding his/her eligibility to hold any constitutional
post. My pail of guilt begins to overflow as soon as I open the newspaper and
learn how badly we are treating our medal winning athletes, how we are unable
to safeguard numerous young girls from being brutally raped and killed, what
kind of primitive dogma our politicians are preaching in a rather uncivilized
language and manner. The pail of guilt finally ruptures when I watch prime time
TV news. I go to sleep having spilled all my guilt down the gutter.
Tomorrow would be another day and the wheel of time will keep
spinning, tirelessly, without change.
The return on investment in publically traded equity is broadly a
function of 3 factors (a) earnings growth; (b) changes in price earnings (PE)
ratio and (c) dividend. Amongst these earnings growth is primary driver for a
sustainable up move in equity prices. The higher PE ratio and dividend yield
usually follow the higher earnings trajectory.
The 100%+ gain in benchmark indices since August 2013, when the
macro improvement cycle began, is mostly a function of PE re-rating; for
corporate earnings have shown little growth. Moreover, whatever improvement in
earnings is seen, it could be mostly attributed to cost savings (especially
financing cost and raw material advantage). There is little evidence of
improvement in pricing power or significantly higher productivity of capital.
The macro improvement cycle is almost over. Financing cost and raw
material prices are showing a distinct upward incline. The foreign flows have
also shown a reversal trend in past few months.
It can therefore reasonably be assumed that the PE re-rating cycle
is mostly over. Any improvement in equity returns from this point onward will
have to be driven entirely by earnings growth.
The corporate fundamentals would need to show material improvement
over next 9-12 months to sustain the present valuation levels.
The current implied earnings growth over FY19-FY20 is well over
20%. If we consider the historical perspective, in a rising rate, rising
inflation, scenario the earnings growth of over 20% has not been sustainable.
Even if we can manage this kind of earnings growth (not my base case) due to
very low base (almost no growth for over 3yrs now), FY20 could be a challenge.
I therefore expect a PE de-rating in 2018. Financials and capex would be
the theme that should suffer the most.
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