Over the past, earnings growth expectations and equity market performance have typically had a meaningful relationship. This linkage has weakened considerably since 4Q CY2012. Equity markets have held out despite substantial cuts to earnings growth expectations. Note that most of the pain for investors and the underperformance of Indian equities relative to peer group have been due to sharp currency depreciation.
Macro developments – more global than local – particularly related to QE and expectations of tapering herein have been the dominant drivers of investor sentiment and equity performance over the last year. Expectations of global liquidity, rather than growth, have emerged as the key driver of market performance.
A similar trend was witnessed in 2007, before the global financial crisis. Despite the RBI tightening monetary policy and growth expectations being scaled down, markets rallied due to abundant global liquidity. That said, we believe weak corporate performance may itself not precipitate a sharp sell-off in the equity markets.
