Hermes major reasons why markets are plunging all over the world1
The benchmark Sensex companies' underlying earnings per share are down 3 per cent (on a cumulative basis) since January 2015, against 25 per cent rise in the index value during the periodThe latest correction in global equities, including in India, can be attributed to two factors: Poor growth in corporate earnings and a steady rise in bond yields or interest rates in the world major financial markets, especially the US.Analysts say while poor corporate earnings made it tough to Hermes Special OFFER multipurpose justify rich valuations on the street, the rise in rates lowered the relative attractiveness of equities over less risky assets such as fixed income and fixed deposits in banks.latest correction has nothing to do with economic conditions but it is largely a reaction to the massive build up of market capitalisation in the past three years without a commensurate rise in corporate earnings."This correction became imminent as a sudden spike in bond yields in the US raised the risk reward ratio for equities, says G Chokkalingam founder and managing director, Equinomics Research Advisory Services.For example, in India the gains to equity investors in the past three years came from expansion in stocks price to earnings (P/E) multiples rather than earnings growth.
The benchmark BSE Sensex 30 companies underlying earnings per share are down 3 per cent (on a cumulative basis) since January 2015, against a 25 per cent rise in the index value during the period.The index is trading at 24.5x its underlying trailing 12 months earnings, up from 19x at the beginning of January 2015.In the US, expansion in P/E multiples accounted for 70 per cent of the gains that equity Hermes major reasons why markets are plunging all over the world investors made since January 2015.The benchmark Dow Jones is currently valued at 20.5 times its trailing 12 months earnings, up from 16x at the beginning of 2015.Analysts say poor earnings growth is not a concern as long as interest rates (or bond yields) are low, justifying continued investment in equities.The sudden weakness in equity markets can be traced to the unexpectedly strong labour markets in the US with higher than estimated hiring by the private sector and a steady rise in salaries and wages.For example, at 2.8 per cent year on year rise, wage growth in the US during 2017 was the highest in nearly a decade.A tight labour market could translate into higher retail inflation and faster than anticipated rate hikes by the Federal Reserve.
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