Slowing Earnings, Racing Inflation May Spoil India's Equity Jamboree, Says Ruchir Sharma
But inflation looks relatively well behaved and there have been no great signs of major earnings slowdown, the Rockefeller International chairperson says.
"Is there something called a permanent bull market?" asked veteran investor Ramesh Damani. "Of course not," came the reply from market savant Ruchir Sharma.
In a freewheeling chat with Damani, Rockefeller International Chairperson Sharma identified two likely red flags that can signal the end of Indian markets' gold rush — earnings cooling down and inflation flaring up.
If earnings growth really begins to slow down, and the market keeps hanging up there, that means momentum has begun to slow down, according to Sharma.
The June-quarter earnings reported by 27 NSE Nifty 50 companies managed to meet Street expectations, pipping the 20 that managed the feat in the quarter ended March. The ones that beat expectations declined to 11 from 21 during this period, while 12 missed estimates against nine.
The cumulative profit of Nifty 50 constituents rose 3.96% year-on-year but fell 8.3% sequentially. During the period, cumulative revenues of Nifty 50 rose 0.58% from a year ago, while operating profit of the non-financial constituents declined marginally.
Then, if the central bank — the Reserve Bank of India — is forced to tighten money in this environment, "I think that will be a big negative for the market", Sharma said.
India's retail inflation, measured in Consumer Price Index, eased to 3.54% in July after the first spike this year in June to 5.08%. A low-base effect was responsible for this five-year low seen last month.
Core inflation, which discounts the volatile food and fuel rates, is on the rise. Minutes of the last policymakers' meet showed growing concerns among two external members over "growth sacrifice". RBI Governor Shaktikanta Das has called for vigilance in the last mile of disinflation, with food inflation showing little signs of abatement in the near term and household inflation expectations picking up.
Sharma's comments came days after Federal Reserve Chair Jerome Powell said "time has come" to cut policy rates, to the markets' cheer. The Federal Open Market Committee is slated to meet on Sept 17–18. The Monetary Policy Committee back home will convene on Oct. 7–9, with new external members.
That's my fear. A lot of the current generation has not really seen what a downturn can look like. But we've lived through those periods.Ruchir Sharma, Chairman at Rockefeller International, said during his conversation with Damani, that covered everything from Indian economy's trajectory to the US presidential election, and his new book 'What Went Wrong With Capitalism'.
No Brakes On The Bull Run Yet
These red flags are not going to pop up any time in the near future, Sharma said, as "inflation still seems relatively well behaved and we're not seeing any great signs of a major earning slowdown".
While there are signs of earnings in mid- and small-cap companies dragging their feet, earnings are generally doing relatively well, according to Sharma.
The former Morgan Stanley chief investor identified earnings growth as one of the factors driving the Indian markets. "It's been a very broad-based rise of at least the stock market."
"Various sectors have done well in India. So that way it seems grounded in the reality that the economy is moving in the right trajectory," Sharma said.
This growth has been amplified by the growing financialisation in India, he added. "People in India hardly owned any equities, and now they've become used to pouring money into equities at every dip, every month."
This financialisation has led to India now trading at a big premium to other emerging markets.
This combination of the economy being on the right trajectory, the fact that earnings growth has held up, and now it's been fuelled increasingly by the steady flow of domestic money is what I think has really helped Indian market.Ruchir Sharma, Chairman, Rockefeller International
