Rebound Forecast for India Earnings as Oil Drop to Buoy Spending

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Indian money managers are starting to see the glass as half full in their company earnings outlook.

Falling oil prices are underpinning expectations that the worst is over for corporate profits as savings translate into higher investment and consumer spending, despite the worst equity losses in six years on Monday amid a global rout. The S&P BSE Sensex earnings climbed 1 percent in the quarter to June, following a 45 percent drop in the prior three months, data compiled by Bloomberg show.

The 57 percent drop in Brent crude in the past 12 months will save the government about $50 billion a year, estimates Ramesh Damani, an investor and a member of BSE Ltd., Asia’s oldest bourse. Sensex earnings will jump more than 40 percent in the coming year, forecasts compiled by Bloomberg show.

“The enormous fall in commodity prices helps India to the top of the tree,” Jonathan Garner, the head of Asia and emerging-market strategy at Morgan Stanley in Hong Kong, said in an e-mail on Monday. “India is the only place in the emerging world where we are seeing an industrial production pick-up while inflation is falling.”

Official data showed consumer inflation eased to an eight-month low in July and wholesale prices fell the most on record, adding pressure on central bank Governor Raghuram Rajan to add to this year’s three interest-rate cuts. Factory output in June climbed higher than expected, a separate report showed.

‘Biggest Fix’

The government added to the optimism by announcing a plan to inject $3.1 billion into state-owned banks to bolster loan growth and risk buffers amid rising bad debts. Loans in the 12 months ended July 24 expanded near the slowest pace in two decades, while stressed-asset ratio of state lenders was at the highest since 2001 on March 31, central bank data show.

“This was one of the biggest fixes that the government needed to make,” Gaurav Patankar, an emerging markets portfolio manager at Boston Company Asset Management LLC, which oversees $47 billion, said in an interview to Bloomberg TV India. “I feel better now about the credit offtake that can happen over the next six to nine months.”

While analysts have trimmed the estimates for fiscal 2016 profits by 7.2 percent since the start of April, they forecast net incomes to grow 4.5 percent in the July-September period and 11.5 percent in the December quarter, data compiled by Bloomberg show.

Bills Stalled

Prime Minister Narendra Modi won the strongest electoral mandate in 30 years on the promise of faster growth and more jobs. A year later, investors’ enthusiasm has waned after key bills, including a plan for national sales tax, were stalled by political wrangling.

The Sensex tumbled the most since 2009 on Monday, and was set for its biggest monthly loss since November 2011. It jumped 30 percent in 2014. The gauge climbed 1.1 percent at the close in Mumbai on Tuesday.

The highest borrowing costs among major Asian nations may undermine the recovery in earnings, said S. Naren, chief investment officer at ICICI Prudential Asset Management Co., India’s second-biggest money manager with $24 billion. Governor Rajan left a key rate unchanged on Aug. 4.

“You need fairly significant rate cuts,” Naren said in an interview with Bloomberg TV India. “You need property and infrastructure sectors to deleverage for growth to come back.”

Moody’s Investors Service on Aug. 18 reduced its growth forecast for India to 7 percent from a previous estimate of as much as 7.5 percent, citing below-average rain and slow pace of reforms. It still sees 7.5 percent growth in 2016.

‘Good Position’

Bulls say India’s economy is less affected by a slowdown sparked by an expected increase in U.S. rates and China’s yuan devaluation. China accounts for 5.2 percent of India’s exports, compared with 24.6 percent for Indonesia and 31.4 percent for Korea, official data show.

The nation is in a “good position” compared with other emerging markets due to strengthening economic growth, cooling inflation, narrowing fiscal gap and reserves of $380 billion, Rajan said on Monday. Global funds fled in 2013 when the Fed first signaled it would end stimulus. They’ve bought $6.8 billion of shares this year, the highest after Japan.

“India is one of the best stories in the region with good demographics, stable government and low consumer debt, and that is what attracts foreign investors,” Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments, said in an interview with Bloomberg TV India. “We’re in a contest where the least ugly wins.”

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