The outlook for Indian stocks for 2019 has been downgraded for the first time this year, according to a Reuters poll of strategists who expect the market to recoup its recent losses only once uncertainty around next year`s elections fade. Pressured by a steep sell-off in global equities along with dwindling credit supply, India`s main stock index, the BSE Sensex, has fallen about 10 percent since hitting a life-high of 38,989.65 on August 29.

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October was its worst monthly decline since the financial crisis a decade ago. With state elections slated over coming months and a general election scheduled for May, Indian shares could remain subdued until the results become clear, according to a Nov 13-26 poll of 50 strategists.

"The political uncertainty plus the correction in global stocks can take the local market down in the short-term and once these concerns go away, we can expect it to recoup most of the losses," said CA Rudramurthy, managing director at Vachana Investments. Yet even by the middle of next year the BSE Sensex is forecast to have regained only about half its recent losses to trade at 37,000 from Tuesday`s close of 35,513.14. 

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While it is expected to rise to a new record high of 39,400 by end of next year, thanks to strong corporate earnings, the strategists lowered 2019 predictions in the latest poll, the first downgrade in Reuters surveys this year. The August poll had a median forecast of 41,200 as the record-high.

Over 60 percent of 26 common contributors from the previous poll cut end-2019 forecasts and two did not make any change. Only eight were more optimistic. The less bullish forecasts for next year underscored anxiety over a range of factors including the elections, the rupee currency`s sharp losses this year, capital outflows from emerging markets including India, and a tussle over policy between the Reserve Bank of India (RBI) and the government.

The rupee has lost about 10 percent this year making it Asia`s worst performing major currency. The RBI board`s decision on November 19 to ease liquidity conditions by giving banks more time to shore up capital and increase lending to small businesses, in addition to open market operations, has helped the rupee gain about 2 percent since then.

"Keeping aside the political uncertainty, markets have already corrected significantly, recovery in corporate earnings and strong macro-economic factors will push the index further up as the dust will settle around the liquidity situation probably next year," Vachana Investments` Rudramurthy said.

STRETCHED VALUATIONS?
Over 80 percent of 45 equity strategists who answered an extra question said company earnings growth has not yet peaked in India, though there are signs the pace will slow over the next year.

"The long wait on earnings growth is finally coming to an end, as they are expected to grow above 20 percent in 2018 and 2019, though the expectations have been somewhat moderated in the second half of the year," said Kunal Kundu, India economist at Societe Generale.

Given many companies have missed profit estimates over the last four years and several have lowered their outlook for last quarter, a significant pickup in earnings growth is unlikely, some strategists said.

Seven respondents also said company earnings growth has already peaked. "The downside risks to earnings estimates have increased over the past two months, given the liquidity concerns, the rising cost of funds and input cost inflation," noted Gautam Duggal, head of research at Motilal Oswal.
The price-to-earnings ratio - a widely used measure for stock valuation - for the BSE Sensex is currently well above its long-term average.

And despite a sharp fall in recent months, nearly two-thirds of 47 strategists who answered a separate question said Indian shares were expensive. While 17 analysts said they were fairly priced only one said they were cheap.

"Domestically, concerns over the scale of balance sheet problems in the shadow banking sector will rumble on for a while yet. And even with the recent slump, valuations continue to look stretched," said Shilan Shah, senior India economist at Capital Economics.