Macro indicators show positive change for growth drivers By RIDHAM DESAI, MORGAN STANLEY Not surprisingly, broad market earnings growth has suffered in recent quarters. A combination of slowing revenue growth, falling Ebitda margins and rising interest costs has caused this. The macro indicators are showing positive change for these drivers and hence, incrementally, a better earnings picture. M1 growth has led broad market revenue growth by six months directionally though not in magnitude. M1 growth has seemingly put a firm bottom in place in November 2011 and accordingly, broad market revenue growth may have found a floor in the quarter ended June 2012. In a couple of months, revenue growth should start to look up or at least stop decelerating. There is still a stiff base effect – revenue growth was 24% in the September and December quarters of F2012 but a QoQ improvement is in order based on the direction of M1 growth. A boom in profit margins needs a strong investment cycle. Sans an investment cycle, margins in the current context will be an interplay between the current account deficit and the fiscal deficit. If the former falls faster than the latter, margins will likely expand. We see this as the likely outcome in the coming 12 months. Of course, if the investment rate comes sharply again in F2013, then the relative performance of CAD to fiscal deficit will be less relevant to corporate margins. Bottom-up margins have support from a favorable base given the compression seen over the past few quarters. Interest costs are up more than 40 per cent YoY and interest to revenues is at multi-quarter highs. Over the past few weeks, the 3-month commercial paper rate has fallen by nearly 300 bps and this rate is now flat YoY. There is obviously some seasonal factor in play but it is unlikely that the YoY rate of increase reverts to levels seen over the past 12 months. To that extent, interest costs may have also peaked.