Earnings recovery unlikely for Indian market

See why Morgan Stanley is so pessimistic.

In its latest India strategy research note, Morgan Stanley predicted that the Indian market is bound for near-zero earnings growth over the next year because of how returns on the index have been performing as of late. But it did note that the falling margins and rising interest rates that led to compressed earnings growth are now tempering, and could lead to a strong rebound of 15-20% growth after a year has past.

Here's more from Morgan Stanley:

Earnings expectations low: If its performance is an indication, the market is dismissing the prospects of an earnings recovery. Its 12-month trailing returns lead the consensus 12-month forward EPS growth forecast by six months. The returns on the index suggest that the earnings growth could be close to 0% in the coming 12 months.

In contrast, we believe that a new earnings cycle is taking shape. Our earnings growth-leading indicator suggests that the worst for earnings growth is over. In the past five years, falling gross margins and rising interest rates were prime reasons for compressed earnings growth. Both appear to be reversing.

From a top-down angle, a collapse in the investment rate and the widening current account deficit explains the fall in the share of profits in GDP. While the investment rate is stabilizing and recovering from its low point, the CAD may have seen its worst in the Dec-12 quarter (given fiscal consolidation and an INR that is no longer undervalued).

We believe that the earnings growth could rise to 15-20% by the end of the next 12 months.