State Bank of India Life Insurance is turning more cautious towards domestic equities because of disappointing corporate earnings and is set to get choosier about its stock picks in anticipation of choppier Indian markets.

That's the prognosis of Gopikrishna Shenoy, the group's chief investment officer, who singles out discretionary and staple consumer goods makers, construction firms and retail banks as sectors that might yet fare better over the next 12 months.

“We will be selective and put money in a few sectors that we think will likely grow better in terms of earnings relative to index [Sensex or Nifty 50] earnings,” Shenoy told AsianInvestor.

The insurance arm of India’s largest state-owned bank, a joint venture with BNP Paribas Cardif, had 23% of its Rs1,163 billion ($17 billion) in assets under management invested in equities at the end of March.

A key reason for the caution is that Indian companies have not performed as well as might have been expected, despite the economic optimism that has swirled over Prime Minister Narendra Modi's India. 

“Earnings growth for equities has unfortunately not played out the way we hoped,” Shenoy said. “I have been waiting for the past three years for earnings forecasts to be proved right but that has not happened.”

That’s a sentiment shared by Pankaj Tibrewal, equity fund manager with Kotak Mahindra Asset Management Company, who acknowledges that earnings growth data in recent years has been far lower than forecast.

Even in 2017, when the benchmark Nifty surged 27%, earnings growth came in the single-digits, and has reportedly remained that way for several years.

Earnings growth practically went nowhere in the March-end quarter after the profitability of state-owned banks, already creaking under a massive pile of bad debts, was further dented by the introduction in February of tough new provisioning rules for stressed assets.

The new rules meant banks had to treat a company as a defaulter even if it missed just one day of the repayment schedule and begin resolution proceedings. The new provisions took a huge bite off expected bank earnings, according to Tibrewal.

Since banking stocks account for 35% of the benchmark Nifty 50’s earnings, it’s little wonder that they pulled down the overall corporate earnings growth rate, he said.

CLOUDED OUTLOOK

Both Shenoy and Tibrewal expect earnings growth in India to be muted for a few quarters more as banks continue to digest the new provisioning norms.

Nevertheless, Shenoy does expect a pick-up in earnings growth of around 18% in the financial year ending March 2019 as well as for the 12 months after that.

Those expectations might still face disappointment because banking sector woes apart, there are other storm clouds looming on the horizon for Indian equities.

Crude oil prices are surging (India is a net importer of oil), which has caused the rupee to slide, becoming Asia’s worst-performing currency so far this year. 

Foreigners are also fleeing local stock and bond markets. In the year to June 13 period they have pulled out $249 million from equities and another $5 billion from debt markets, data from NSDL shows. They have been net sellers every month barring January.

All of this will be troubling news for the Modi, who faces a general election by April/May 2019. It will also likely keep markets relatively jittery.

Still market volatility isn’t all bad, according to Shenoy. If you look at investment returns from a three-year perspective, volatility offers investors the opportunity to put money to work, he said. “Can you expect great returns? Maybe not this year. Is it a good time to invest? Yes.”