India's Stock Market: Turning the Corner with Earnings Recovery and Sector Growth

India's Stock Market: A Turnaround on the Horizon

After a lackluster performance this year, the Indian stock market is poised for a turnaround, driven by a significant recovery in corporate earnings. The MSCI India index has seen a decline of nearly 4% on a year-over-year basis, contrasting with the gains in North Asian markets like China, Korea, and Taiwan.

Identifying the Reasons for Underperformance

According to Sridhar Sivaram, Investment Director at Enam Holdings, the primary reason for India's market lag is the sluggish earnings growth over the last six quarters. The single-digit growth during this period has largely explained the market's trajectory.

A Forecast for Recovery

Looking ahead, Sivaram forecasts a significant rebound, with earnings growth expected to reach 15 to 18% in FY27. This revival is anticipated to spark a market comeback, starting from early next year, driven by a concerted effort by the government and the Reserve Bank of India (RBI) to tackle low nominal gross domestic product (GDP) growth.

Key Sectors for Investment

Sivaram highlights key sectors for investment, including:

• Financials, such as banks and non-banking financial companies (NBFCs), which are expected to benefit from sustained low interest rates
• Discretionary consumption, particularly at the higher end, with sectors like autos, travel, tourism, and hotels expected to benefit
• Pharmaceuticals, where many bottom-up stories are emerging

However, Sivaram remains cautious about broad rural consumption, noting that low food prices continue to hurt a segment of the rural economy. He also advises a nuanced approach to the e-commerce sector, where valuations remain a concern for many companies.

A Positive Outlook

With the anticipated recovery in corporate earnings and the growth of key sectors, India's stock market is poised for a turnaround. As the government and RBI continue to take steps to boost consumption and kickstart the growth cycle, investors can look forward to a more positive outlook for the Indian stock market.