Tuesday 6 December 2011
2012 expected to be tough for markets
Bank of America Merill Lynch (BofAML) expects tough market conditions to persist over the next six months and the Sensex to correct to 14,500 as growth concerns take centre-stage. However, the brokerage has set a target of 19,000 for the year-end. “The good news is that we could get some positive returns in 2012 if policymakers take steps to reverse the economic slowdown such as aggressive rate cuts by RBI. Markets typically rally 3-6 months after the rate-cut cycle starts,” said a recent India Strategy report brought out by the brokerage.
Citi has set a target of 18,400 for the Sensex at a 1-year forward price-to-earnings multiple of 14x, a 10%.discount to the long-term average. Citi’s equity strategy report hit a note of optimism by stating that “inflation is statistically set to go down, interest rates will not continue to rise as demand falls, and the government has recently done more than in two years. Valuations are relatively attractive and earnings growth has been cut almost as sharply as in 2008”.
Morgan Stanley, on the other hand, has set a probability-weighted one-year target of 18,741 for the Sensex, 16% above the current level. “Valuations are attractive on an absolute basis and, market positioning, as evidenced by our proprietary sentiment indicator, is bearish. Together with the collapse in earnings revisions, this sets up the market for an upward move in 2012. The market’s P/B is implying a long-term return of 16%, which we think is a good return in the context of India’s equity risk premium,” stated a recent research report brought out by the brokerage.
BofAML expects India’s FY13 GDP growth to slow to 6.8% on the back of a slowing global economy, high interest rates and slowing investment spend. Earnings downgrades are likely to continue as well, led by slowing sales and sustained margin pressure from rising labour and interest costs.
According to Morgan Stanley, the government’s policy hiatus coupled with fiscal and current account deficits could pose problems for India. “A global crisis could cause the fiscal deficit to rise. This could imply that yields may stay higher for longer with negative implications for equities,” the broker’s report said. It further observes that the current account deficit could cause currency underperformance and have a negative effect on macro growth and corporate balance sheets. “We know from 2008-09 that while Indian earnings outperformed the world, its equity markets significantly underperformed for this very reason.”
Citi has set a target of 18,400 for the Sensex at a 1-year forward price-to-earnings multiple of 14x, a 10%.discount to the long-term average. Citi’s equity strategy report hit a note of optimism by stating that “inflation is statistically set to go down, interest rates will not continue to rise as demand falls, and the government has recently done more than in two years. Valuations are relatively attractive and earnings growth has been cut almost as sharply as in 2008”.
Morgan Stanley, on the other hand, has set a probability-weighted one-year target of 18,741 for the Sensex, 16% above the current level. “Valuations are attractive on an absolute basis and, market positioning, as evidenced by our proprietary sentiment indicator, is bearish. Together with the collapse in earnings revisions, this sets up the market for an upward move in 2012. The market’s P/B is implying a long-term return of 16%, which we think is a good return in the context of India’s equity risk premium,” stated a recent research report brought out by the brokerage.
BofAML expects India’s FY13 GDP growth to slow to 6.8% on the back of a slowing global economy, high interest rates and slowing investment spend. Earnings downgrades are likely to continue as well, led by slowing sales and sustained margin pressure from rising labour and interest costs.
According to Morgan Stanley, the government’s policy hiatus coupled with fiscal and current account deficits could pose problems for India. “A global crisis could cause the fiscal deficit to rise. This could imply that yields may stay higher for longer with negative implications for equities,” the broker’s report said. It further observes that the current account deficit could cause currency underperformance and have a negative effect on macro growth and corporate balance sheets. “We know from 2008-09 that while Indian earnings outperformed the world, its equity markets significantly underperformed for this very reason.”
