The earnings optimization surrounding India’s domestic-focused companies may be misplaced as the economy will take longer to recover from a Covid-fuelled slump, according to JPMorgan Chase & Co.
Firms with a heavy reliance on local demand may face a slew of profit downgrades this year due to subdued consumption and wage growth, said Sanjay Mookim, JPMorgan’s head of research, India.
Earnings disappointment would pose another threat to stocks, which have already seen fortunes reverse after being the world’s best performers during the global equity rebound from pandemic lows.
The Nifty has lost 12 per cent since hitting a record in October as concerns about the US Federal Reserve’s rate hikes and high inflation have driven record outflows from local shares.
Also, 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 revival priced into the earnings forecast, which as of now is very tough,” Mookim said in an interview, adding, “Consumption has been weaker than expected and it is now showing up in numbers, in corporate commentary , and also in earnings.”
Wage growth has been the slowest in almost three decades, as companies look to protect margins amid rising price pressures, according to Mookim.
He said the central bank may raise the policy rate to 6.15 per cent after a surprise hike this month to 4.4 per cent. Inflation has breached the 6 per cent upper limit of the central bank’s target range for four months.
“Higher rates increase the cost of capital for equities, but markets are likely to worry more about their impact on economic growth,” said Mookim, adding, “Un fortunately, global rates are also increasing steadily. Indian stock valuations have fallen from recent peaks, but may have further downside still.”
In its base case, JPMorgan expects zero returns from the Nifty index in 2022. It isn’t alone in cautioning about the market. Earlier this month, Bank of America lowered its target for the Nifty gauge, citing surging domestic price pressures and a front-loading of US rate hikes.
That said, a flood of local retail money entering the market has helped keep Indian stocks resilient despite foreign outflows and a plunge in the rupee to a record low. Down 6.3 per cent year-to-date, the Nifty is still faring much better than the 16 per cent slide in the MSCI Emerging Markets gauge.
JPMorgan remains positive on banks as “this is the only sector where the growth-value combination makes sense”, said Mookim.
It is ‘neutral’ on staples and ‘underweight’ on the consumer discretionary sector.