As global stock markets stage a slow recovery, thanks to loads of stimulus offered by central banks across the world, domestic markets too, are beginning to reflect the positivity. Indian markets were up about 19% from its recent bottom as financials and cyclical gained somewhat in the last few weeks. But the worst may not be over yet.
The Indian economy is expected to see a slowdown as the coronavirus escalates. Economists have been slashing growth rates to low single-digits and in some cases, they have even pencilled a negative growth.
Under these circumstances, earnings growth of Indian companies can hardly see much growth even factoring a nominal inflation level. Little surprise, global banks are not so gung-ho about India. Goldman Sachs has lowered earnings growth forecasts considerably.
In fact, Goldman expects earnings to decline by about 18% year-on-year this year and overall profits (including financials) to contract by 13% y-o-y in CY2020.
“In terms of the quarter path,” notes Goldman “we expect a deep contraction in earnings in H1 and recovery in 2H with a 23% rebound in earnings in CY2021.” Much of the sluggish growth is expected to come from the discretionary, capital sensitive and commodity-related sectors.
“These include profit declines in autos (declining volumes trend outlook), metals /mining (decline in realizations), Energy (inventory losses from lower oil prices, lower realizations for upstream cos.), Industrials (lower capex activity at central /state level) and cement (lower demand). Earnings for the financial sector are also likely to get impacted from tepid loan growth (lower demand, higher risk aversion) and potentially increasing credit costs,” pointed out Goldman in a report.
So, under these circumstances, investors best hope is to stick to the tried and tested defensive sector. Some of these defensive sectors are known and are rallying from a deep sell-off in the past few years such as pharmaceuticals. While technology may slow, the loss can be offset from the fall in the rupee. Further, consumer staples and telcos are also likely to be less impacted during the coronavirus pandemic.
“We upgrade consumer staples and telcos to overweight. While staples still look expensive and are likely to see business disruptions (from logistical and manufacturing issues), we think earnings are likely to be relatively less impacted compared to other domestic cyclical sectors given offset from lower input costs and likely pick-up in demand due to stocking-up on essentials,” said Goldman Sachs India analysts in a report.
