The rural stress, demand disruption due to general elections is among the key causes. (Photo: Hindustan Times)
The outlook on profit growth is gloomy globally
2 min read . Updated: 16 Jul 2019, 10:31 AM IST Harsha Jethmalani
Region wise, profit expectations in the US fell sharply to the lowest since late 2016
As for India, analysts cautioned that the growth slowdown that started a couple of quarters ago is expected to broaden
EarningsProfit growth
Mumbai: A recent survey shows that the backdrop for the June quarter earnings season is anything but bright. A tri-annual survey conducted by IHS Markit in June showed optimism among Indian companies regarding output and profitability further faded.
"Predictions of softer activity growth underpin downward revisions to the profits outlook, subdued hiring plans and relatively muted capex intentions," said the survey report.
Unfortunately, the earnings growth scenario is not much different elsewhere, which is largely a consequence of the trade tussle between the US and China.
IHS Markit's global business outlook survey for June showed worldwide business optimism related to future output and profits slid to its lowest since 2009. "Profits gauges are down to new survey lows in both manufacturing and services, with the latter indicating especially weak optimism," said the survey report.
Region wise, profit expectations in the US fell sharply to the lowest since late 2016, accompanied by a similar weakening of hiring intentions. Profit expectation in the UK, meanwhile, stayed close to February's post-recession low, and slipped to a six-year low in the eurozone. In the emerging markets as well, companies reported their bleakest outlooks for profits, employment and business investment seen since 2009.
Commenting on the survey, Chris Williamson, chief business economist at IHS Markit said, "Not only does the survey indicate a further weakening of global economic growth in the second half of 2019, but companies are expecting profits to be especially hard hit, which is leading to a pull-back in both hiring and business investment around the world."
He further added, "The big change since earlier in the year has been a marked deterioration of optimism among US companies, alongside a slide in business optimism in China, indicating how trade war tensions are hurting both economies."
As for India, analysts cautioned that the growth slowdown that started a couple of quarters ago is expected to broaden. In addition to the rural stress, demand disruption due to general elections is among the key causes.
Brokerage house Motilal Oswal Securities Ltd said risks to earnings remain tilted towards the downside, given the still weak underlying demand scenario and lack of private capex recovery. "The earnings growth recovery in FY20 is likely to be narrow and predominantly led by financials, even as global cyclicals drag and consumption-oriented sectors post deceleration in earnings," added its earnings preview report.
"Margins could continue to remain under pressure (negative operating leverage, rising input costs, rising competition, etc), despite low reported inflation," domestic brokerage house Emkay Global Financial Services Ltd said in a report on 9 July.
Meanwhile, the recently announced Union Budget for FY2020 has done little to address growth concerns. Contrary to investors' expectations, no big-bang stimulus was announced to boost consumption. With that, the onus to revive the economy has shifted to the Reserve Bank of India, which is expected to provide monetary stimulus. That said, the challenge on transmission on interest rate cut remains, leaving little hope for a quick turnaround in the economy and thereby corporate earnings.