3 Reasons you must curb high expectations in 2015

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  • Reasons you must curb

    high expectations in 2015 3

  • What a year 2014 was

    for the stock markets!

  • The Sensex jumped a

    whopping 30% last year!

  • Naturally, optimism is high about the

    stock markets performance in 2015.

  • Especially since the economy seems to

    be on the mend and the government

    continues its reform agenda.

  • However, analysts advise investors to

    tone down their expectations of a high

    market return this year. This is especially

    so in the next few months.

  • Here are THREE

    reasons why-

  • #1 High valuations

  • Share prices rose significantly in the recent past in anticipation of an

    improvement in corporate profits and economy. As a result, stocks

    currently have high valuations.

    This is measured by the Price to Earnings (PE) ratio, when the stock

    price is divided by the companys earnings per share. It shows how

    much an investor is paying for every rupee of profit earned by the

    company.

    #1 High valuations

  • The one year-forward PE is currently estimated at just over 16 times.

    This is the highest it has been since January 2011 and expensive. We

    find valuations of quality stocks in high-growth sectors quite expensive

    and see risks of downgrades to earnings in case of certain sectors such

    as automobiles and industrials if economic recovery is weaker than our

    expectations, according to a Kotak Securities report.

    #1 High valuations (Contd.)

  • #2 Positive factors discounted

  • Todays share price is a reflection of tomorrows growth.

    Indian markets have already discounted a slew of positive factors like a

    cut in interest rates or better economic growth prospects. This could

    limit the bull-trend in the near future. Only a higher-than-expected rate

    cut could set the markets on fire.

    #2 Positive factors discounted

  • However, the chance of a large rate cut is unlikely, especially

    considering the RBIs wariness. The rate cut also depends on factors

    like rupee-dollar movement, global crude oil prices, improvement in

    exports and domestic inflation.

    Moreover, the Federal Reserve plans to increase its interest rates in the

    US. This could negatively affect Indian markets. In anticipation of such

    a move, the RBI could very well prefer to take a cautious stand.

    #2 Positive factors discounted

    (Contd.)

  • #3 Government Reforms

  • The Narendra Modi-led government is one reason for the markets bull-

    run. It announced a slew of reform measures at timely intervals last

    year, cheering the markets. Major economic reforms could be stalled as

    the government does not have majority in both houses of Parliament.

    However, reforms are not the only factor concerning markets.

    #3 Government Reforms

  • The governments fiscal deficit is still a big issue. This is the amount by

    which the government spends more than it earns. A high fiscal deficit is

    bad for the economy.

    The government, in its maiden budget, targeted a fiscal deficit of 4.1%

    of the GDP or Gross Domestic Product a measure of the economy.

    However, reports suggest that the government has already touched

    99% of this amount. This throws doubts about the ability to meet its

    target of 4.1%. If it overshoots the target significantly, markets may not

    take it kindly.

    #3 Government Reforms (Contd.)

  • 15.7% The net profit growth of the 50 companies that form the NSE Nifty is

    expected to grow 15.7% in FY2016 and 16.4% in FY2017, according to

    a Kotak report.

    This is much higher than the 5.7% expected in FY2015. Real estate is

    expected to lead the Nifty companies with a 43.4% growth in FY16,

    followed by auto (33%), cement (28.4%) and industrials (32.7%).

    A number to remember-

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