05 SEPTEMBER 2019
Equity markets seem to have turned quite bearish in the last few months over a subdued macro outlook, driven by – consumption slowdown, liquidity tightness, NBFC stress, earnings downgrades and global trade uncertainties. Citi analysts, however, believe that much of the negativity is priced-in now, and see limited downside from current market levels.
As highlighted in our earlier note, the Earnings Yield Gap (10yr bond yields - Earnings/Price) has narrowed after the recent correction in both equity prices and bond yields. Equity investments have returned 16-17% in the past couple of instances after the gap was at similar levels. Further, India has underperformed its Emerging Market (EMs) peers over the past 3 months and is now trading at 45% premium to EMs, close to the 10 year mean of 40%.
Highlighting a cautious market sentiment, large-cap indices have significantly outperformed the mid/small cap indices since 2018. The valuation premium of large-cap indices over mid-cap is now over 1sd above mean (in terms of 1yr forward P/E).
BSE-100 earnings declined 1% YoY in 1QFY20 (vs estimates of +5% growth), missing expectations across all sectors, except Energy. Nifty FY20 earnings growth estimate now stands at 16% YoY (down from +21% estimated at the start of the fiscal), most of which is expected to be driven by a 24% YoY decline in provisioning expenses for banks. Citi analysts revise down their Sensex target for March 2020 to 39,000 (from 39,500 earlier) to reflect the earnings downgrade. Government policy action, transmission of rate-cuts by banks, crude oil prices, further easing by global central banks and trade negotiations remain the key triggers to watch out for.