Sensex and India’s earnings recovery

Timothy Moe, chief equity strategist for the Asia-Pacific region at Goldman Sachs (GS), believes that the long-term prospects for India are the best among the emerging markets (EEM) (EDC) (VWO). In addition to this, India (INDA) could achieve potential GDP growth of 7%–8% or higher. The contribution of service exports to its GDP is rising. Major information technology companies such as Infosys (INFY) and Wipro (WIT) are the top software service exporters.

Why India Looks Like an Attractive Emerging Market

The trailing earnings per share for India’s BSE Sensex (INDA) Index recovered 4.5%, while the forward EPS rallied 13.3% between mid-February 2016 and July 2016. The Sensex Index surged nearly 24.6% during the same time period.

The finance sector constitutes around 30.5% of the BSE Sensex Index. The recovery in commodity (DBC) prices in mid-February 2016 was a big boost for Indian banks, which have huge exposure to the steel-making industry. Steel prices showed little improvement on the slight rise in China’s (ASHR) (MCHI) (YINN) demand. Companies operating in India’s metal and mining sector are more leveraged to bank loans. Therefore, commodity prices determine the earnings trend of the index. Vedanta (VEDL) and Tata Steel are the major metal and mining companies of the Sensex Index.

Dollar is supporting commodity prices

The surge in the dollar index after the Fed ended its QE (or quantitative easing) program in October 2014 was one of the major factors that affected commodity prices. However, on a YTD basis, the dollar index has fallen about 2.8%. The fall in the dollar index is a big boost for commodity-consuming emerging economies like India.

Factors supporting India’s business

The ease of doing business in the country, its demographics, and its per capita income will drive growth in India’s economy. Even though the Indian stock market witnessed a rough start at the beginning of 2016, it will remain one of the most focused business centers in the region. The improved ease of doing business in India has translated to higher corporate earnings that have boosted wage growth and employment statistics for the country.

The current Indian government is also gradually taking new steps to make business easier in the economy. The growth drivers listed above will result in higher corporate earnings. If the government continues its same stance in the future, India could see long-term economic growth.

In the next part of this series, we’ll analyze which factors are supporting the movement of emerging markets.

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