India May Not Share The Good Fortunes Of Emerging Markets
The strong rise expected in emerging markets over the next two years may not apply to India, as the country has different market dynamics, according to Bank of America Merril Lynch's 2018 strategy note.
Emerging markets are expected to return close to 100 percent over the next two years, according to Bofa-ML strategist Ajay Kapur. However, unlike the broader emerging markets, returns on equity in for MSCI India have been on a declining trend, the strategy note added. But the rise in emerging markets is likely to have a “positive rub-off” on India, it added.
BofA Merrill Lynch said that Indian equities benefitted from the global asset inflation and the “global fortunes” will have a large impact on prices in the country in 2018.
Much of the increase in Indian equities is on the back of higher multiples.BofA Merril Lynch Strategy Note
The MSCI India index is close to the highs it had seen after the global financial crisis on forward price-to-book multiples than the rest of the emerging markets.
Hence, it is unlikely that Indian return on equity will “suprise to the extent that a revision to pre global financial crisis valuation highs may be warranted”, the note added.
BofA Merril Lynch analysts Sanjay Mookim and Nafeesa Gupta said that they believe earnings will recover, but that expectations are running very high for a recovery. The Morgan Stanley India Index is trading at 18 times the forward price to equity multiples on elevated earnings expectations. This is higher than the average of 15.5 times the forward price to equity. While the share of financials in the over-profit pool of BSE 500 has down compared to 2013, the analysts said that the underlying strength of index earnings is likely to show up only if banks do not disappoint again.
On earning downgrades, BofA Merril Lynch said that there has been a continued specter of downgrades for MSCI India Index since 2009. It is very likely that Indian earnings might be downgraded some more in near term, it added.
The problem with the earnings downgrade is that it will happen in stark contrast to meaningful upgrades seen in North Asia markets like Korea and Taiwan. And that could be one key reason why BofAML believes that while Indian markets will do well, they will lag other emerging markets.