This Article is From Jan 29, 2018

Rise In Future Earnings Required For Sustainability In Stock Markets: Economic Survey

Over the past two fiscal years, the Indian stock market has soared, outperforming many other major markets. Since end-December 2015, the S&P BSE Sensex has surged 46 per cent in rupee terms and 52 per cent in US dollar terms.

Rise In Future Earnings Required For Sustainability In Stock Markets: Economic Survey

The stock markets have outperformed many major markets in last 2 fiscal years, says the Economic Survey

New Delhi: The Economic Survey 2017-18 tabled in Parliament on Monday said that "sustaining" current stock valuations in India requires "future earnings performance to rise to meet still high expectations". According to the Economic Survey 2017-18, presented by the Finance Minister Arun Jaitley, earnings growth will "depend on whether a significant economic rebound is this time well and truly around the corner".

Over the past two fiscal years, the Indian stock market has soared, outperforming many other major markets. Since end-December 2015, the S&P BSE Sensex has surged 46 per cent in rupee terms and 52 per cent in US dollar terms.

"Does this imply that Indian P/E (price-earnings ratios) ratios have reached a higher 'new normal'? Perhaps. It's possible that the portfolio shift set in train by the campaign against illicit wealth will result in a sustained reduction in the ERP (equity risk premium)," the Survey said.

"...Beyond ERPs, sustaining current stock valuations in India also requires future earnings performance to rise to meet still high expectations. And this outlook, in turn, depends on whether a significant economic rebound is this time well and truly around the corner."

According to the Survey, the exponential rise in the stock markets has led to a convergence in the PE ratios of the stock markets with that of the US at "a lofty level of about 26".