The latest earnings season (first quarter of the financial year 2018 – Q1FY18) was a disappointment. The results suggest that the underlying conditions in several sectors and the broader economy continue to be weak. Q1FY18 net profits of the Nifty-50 Index declined by about 10% Y-o-Y, much worse than consensus expectations. There have been downgrades in full year expectations for FY18 post first quarter results, but we believe that the expectations are still elevated.
While the former concern will largely get addressed in the current quarter, the latter seems a medium to long-term structural headwind. However, the pace of money flowing into the equity market has been faster than the pace of corporate earnings growth, thus leading to stretched valuations. Given the recent downgrade in earnings expectations, the current overall valuations seem to be stretched from a short-term perspective.
Given this, we advise investors to take a staggered and disciplined approach while investing in equities, rather than chasing the momentum blindly. We expect equities to provide healthy returns in the long term. It still remains to be one of the best asset classes to invest in, given issues surrounding physical assets and expectations of moderate fixed income returns.