The G-sec bond yields have fallen to multi-year low after recent repo rate cut by
RBI. The Indian macros have improved strongly in the last two years. With normal
monsoon and easing inflation, RBI’s, move indicates that this would be the right
time to adopt low yield regime conducive for growth. The consumption-led earning
growth will be a potent theme in the markets in near term, with focus remaining on
sectors like Automobiles, retail banking, consumer durables, etc. We believe that
market would remain attractive over its earning potential going ahead.
Low bond yield, boon for economy
The previous low yield regime (2002-04), led to a GDP growth of by 8-9%. This
sparked a strong pick-up in Sensex earnings and a multiyear bull rally in stock
markets from 2002 to 2007. We believe that the Indian economy has gathered
enough momentum for growth with lower inflation and interest rates. With food
inflation expected to cool down further, we believe that more rate cuts will be a
reality going forward. In-line with the earlier instance of low yield, we opine that
this regime is expected to show a strong growth in economy and equity markets. Consumption remains the strong theme
India’s consumption story remains intact and there is ample scope of growth going
forward. Due to normal monsoon this year, the rural consumption is expected to
improve in near term, which will be beneficial to overall growth of the economy. As
pointers, this consumption is already reflected in retail loans, vehicle sales, etc.
This strong momentum in consumption is expected to translate in higher corporate
earnings, which had remained weak in the last two years.
Sensex earnings to grow, valuation near 10-year average
We believe that Sensex earnings are expected to grow by 14-15%, going forward.
We also believe that market will remain attractive over its future earning potential.
As the current level, Sensex is trading at 15.8x of FY2018E earnings. As the
corporate earnings pick-up and economy gathers momentum, we expect Sensex to
reach new heights.

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