As 2015 comes to an end, let us hope that the high volatility will also be behind us. This hope and expectation stems from the fact that we had been through the difficult times for the global and domestic economy last year. The global concern was led by the implication from QE taper and slowdown in the world economy. Whereas lack of reforms and downgrade in earnings outlook has impacted India’s performance.
QE taper has been discussed throughout the year taking Dow Jones index (US) lower by -14.5% and MSCI-EM by -28% from the year’s high, which is currently at -4% and -26% respectively. Now we have a market consensus that the US rate hike will be either in December ‘15 or in January ‘16. The higher than expected US non-farm payroll data has increased the possibility for a Fed rate hike in the coming FOMC meet (December 17). Additionally, FED chairman has also expressed her confidence about the US economy. We have a case that this concern will be buried for an extended time since FED is keen to have a gradual increase only. So we are likely to enter a phase with a possibility of slow FED rate hike along with additional liquidity injection by ECB. ECB in the latest policy meet has extended its bond-buying program to March-17 and is ready to have additional liquidity as per the requirement to the European economy.
As far as the world economy is concerned, IMF has lowered the outlook for world GDP to 3.1 per cent in CY15 with expectation for improvement in CY16 to 3.6 per cent. The world is showing signs of stabilisation with improved activities in developed countries like the US and Europe. This positivity is likely to be cascaded to the developing economy while the unknown factor is whether liquidity will continue to move towards DMs from EMs during this lag time. Equity performance of EMs is currently underperforming to DMs, for example, YTD MSCI-EM has provided a negative return of -18% while MSCI-world is at -3 per cent.
We believe that the global markets will stabilize post the FOMC meet, which will take a call to either hike the rate in December or a direction to do it in January ‘16. Post which, there is a strong possibility for improvement in EMs performance. Whereas, in India, reforms is expected to be kick started through the passage of GST bill in the winter session. The unexpected chaos in Parliament is creating a point of concern for the market. Over the medium-term it will depend on the future earnings growth outlook. We have already seen reduction in FY16 earnings while we have a mild possibility for further consolidation to FY17E earnings. Adjusted for the same, Sensex is available at one year forward P/E of 16x which is near the 10-year average of 1 year fwd P/E of about 15x. This premium is not expensive considering that growth will pick up and earnings will improve by FY17, which is about a quarter ahead. Hence we suggest to accumulate quality stocks when the market consolidates during December ’15 to January ’16.