1Some random equity thoughts -
1. Equity Risk Premium should be around 5%, Bond
Yields assumed at 8.5%, so conservatively earning assumption is 13.5%
(Consensus penciling in EPS growth of 16% FY15E). Assuming assumptions hold
good, this should be doable. Makes case for being invested in equities.
2.
However, for the interim, the bond Yield is at
8.5%, earnings yield is 7% (5900 Nifty, 14.3xPE), still a negative yield gap
(FY15 8.2%). Relative yields do matter when GDP growth is slowing and real
rates are rising. So to match the yields either inflation should be high
or markets should fall (5200-5400 levels). When GDP resumes growth, earnings
momentum will matter.
3.
Markets trading at 14.3x FY14E and 12.1x FY15E.
ROEs still above interest rates for corporate India, breathing space which
prevents immediate market collapse. Market Cap to GDP significantly deflated
from 110% at peak (Median 0.75x) to 0.65x now.
4.
Sector wise, Consumers have done well whenever
growth has tanked and inflation high, like 2008 till date cycle and
previously 1994-1997. Banks done best when balance sheets repaired like in
1997-2003 phase. Proper flows period and high apparent growth has seen
industrials do well. Pharma etc. loose out then. So assuming things bottom out
from here on and Balance sheets are repaired – H2FY15 on it could be the turn
of Financials, Industrials to perform than IT/FMCG/Pharma
5.
FY14 max growth in earnings (Overall 2% growth)
to come from IT – 20%+, FMCG 14%, Auto 14% and bogged down by banks (6%),
Metals (-2%), Cement (-2%) etc.
6.
There are sector and stock specific issues.
Financials we all know how it is, industrials specifically cap goods need
balance sheets to be repaired. Timeline there can be 12ms or more. Power,
Cement, Metals can be fastest off the block if macros reverse as the companies
there are not over leveraged and have healthy BS. Earnings support for
IT/FMCG/Pharma may prevent price destruction but these sectors can relatively
underperform. Auto seems good to take off.
