Volatility May Return to India Bull Market as Profits Falter

  • Investors will be disappointed with earnings growth, Axis says
  • Local stock market has set records while volatility has sunk

The smooth ride for the India’s bull market may be coming to an end.

Volatility is going to rise after sinking to a record in May as corporate profit growth falters, said Jinesh Gopani, whose Axis Long Term Equity Fund beat 97 percent of peers with a 25 percent annual return over the past five years.

Gopani’s opinion puts him in the same camp as UBS Group AG, which has warned about unfettered optimism in India’s stock market, Asia’s fourth largest. Domestic and foreign investors are betting Prime Minister Narendra Modi will deliver on his agenda to make it easier to do business. They’ve pushed up the S&P BSE Sensex Index 18 percent this year, widening the gap between asset prices and earnings growth.

“There’s scope for disappointment as markets have built a lot of hope but earnings are unlikely to revive before March 2018,” Gopani said in an interview. “We will use the dips to buy into long-term growth stories.”

The 129.2-billion rupee ($2 billion) fund had 35 percent of its assets in financial services companies and banks as on April 30, and about 20 percent in auto and auto-parts makers, data compiled by Bloomberg show.

The quarterly earnings season that concluded last week showed a 20 percent profit gain for NSE Nifty 50 Index members, according to UBS. Financial and metals companies accounted for three-fourths of that increase. The India VIX Index, a gauge of expected stock-price swings, rose 1.9 percent on Monday in a rebound from a second weekly loss.

Still, Nifty earnings have been stuck 400-rupee-per-share range over the last four years, data compiled by Bloomberg show. Analysts have pared their profit projections for the year ending on March by 2 percent, UBS said.


Consensus estimates are “still optimistic and we expect further cuts,” analysts Gautam Chhaochharia and Sanjena Dadawala wrote in a May 31 note to clients.

Last week brought another data point of concern: first-quarter gross domestic product growth slowed to 6.1 percent from 7 percent in the previous period. Economists had predicted a rate of 7 percent. 

‘Lower Returns’

The figures showed manufacturing and construction slowing in Asia’s third-largest economy as growth was dented by Modi’s shock cash ban in November. The government stuck to its projection of 7.1 percent expansion for the year to March. Investors must re-calibrate their expectations, Axis’s Gopani said. 

“We may see far lower returns over the next three years than the outsized gains of the past year,” he said.

The firm is bullish on private banks, non-banking financial companies, niche automakers and their suppliers and companies that will benefit from consumer spending, according to Axis Asset Management Co. Chief Executive Officer Chandresh Nigam. Export-heavy companies will face trade curbs and debt-heavy engineering companies will find it tough to raise funds, he said.

Axis doesn’t expect annual GDP growth of 8 percent any time soon, a level last seen in 2016. Private-sector companies are shying away from investing more in their businesses as demand has slowed, Nigam said.

“We are bullish on India’s long-term growth prospects and not wary about the short term hiccups,” he said.

— With assistance by Ameya Karve

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