Earnings optimism surrounding India’s domestically-focused companies may be misplaced as the economy will take longer to recover from a Covid-fueled crisis, according to JPMorgan Chase & Co.
Companies that rely heavily on local demand could face a series of downward earnings revisions this year due to subdued consumption and wage growth, said Sanjay Mookim, head of research at JPMorgan. in India.
The warning comes as sell-side analysts estimate aggregate earnings per share for companies in the benchmark NSE Nifty50 index will rise nearly 17% over the next 12 months.
Earnings disappointment would pose another threat to equities, which have already seen their fortunes reverse after being the world’s best performer as global equities rebounded from pandemic lows.
The Nifty has lost 12% since hitting a record high in October as concerns over US Federal Reserve rate hikes and high inflation led to record outflows from local equities.
In addition, the Reserve Bank of India – whose dovish policy has been a key catalyst for equities – is expected to tighten aggressively.
“There is a huge domestic economic recovery factored into the earnings forecast, which is very difficult at the moment,” Mookim said in an interview, adding, “Consumption has been weaker than expected and it appears now in numbers, in business reviews, and also in revenue.
Wage growth has been the slowest in nearly three decades as companies seek to protect their margins amid growing pricing pressures, according to Mookim.
He said the central bank could raise the key rate to 6.15% after a surprise hike this month to 4.4%. Inflation has exceeded the upper 6% limit of the central bank’s target range for four months.
“Higher rates are raising the cost of capital for equities, but markets are likely to be more concerned about their impact on economic growth,” Mookim said, adding, “Unfortunately, global rates are also rising steadily. Indian equity valuations have fallen from recent highs, but could fall further.”
In its base case, JPMorgan expects zero returns from the Nifty index in 2022. It’s not alone in warning the market. Earlier this month, Bank of America lowered its target for the Nifty gauge, citing mounting domestic price pressures and an acceleration of rate hikes in the United States.
That said, a flood of local retail money entering the market helped keep Indian equities resilient despite foreign capital outflows and the rupee falling to a record high. Down 6.3% since the start of the year, the Nifty is still doing much better than the 16% drop in the MSCI Emerging Markets gauge.
JPMorgan remains positive on banks because “it’s the only sector where the growth-value mix makes sense,” Mookim said.
It is “neutral” on commodities and “underweight” on the consumer discretionary sector.
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