| Earnings estimates plateau: Over the month, consensus earningsestimates for the broad market (MSCI India) were reduced by a marginal 0.5% and 0.1% for FY10 and FY11 respectively. The street now estimates earnings growth of 6% for FY10 and 27% for FY11. Estimates have been drifting in a narrow range for nearly a quarter now. Estimates for the Industrials sector were raised, while Telecom and Consumer Staples sectors saw cuts. • Inflation lifts earnings estimates…Earnings estimates and WPI inflation are positively correlated. Earnings estimates for the Materials and Energy sectors have the strongest correlation with inflation, while this relationship is weakest in the case of Consumer Staples and Health Care.
• …but drags down valuations: Valuations and inflation are negativelycorrelated. The correlation is the strongest with the Financials, Energy, and Consumer Discretionary sectors. Utilities, Health Care, and Staples are sectors with the weakest relationship.
• Sectoral positioning for peaking inflation: In the three months prior toinflation peaking, interest-rate- while Energy and defensives outperform. After inflation peaking, Energy and Materials tend to underperform, while the relative performance of interest-rate- • J.P. Morgan economists expect inflation to peak at about 12% inJune-July: We remain underweight on state-owned banks, real estate,and consumer discretionary. We expect to review our stance at the end of 2Q CY10 when inflation could reach our cyclical peak target and initial estimates on the monsoon are made available. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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