In August 2012, CLSA Asia-Pacific Markets lowered its 12-month target on Sensex to 18,200 from 19,500 to factor in a corporate earnings downgrade. The brokerage singled out faster slowdown of growth as the key downside risk and said it would remain cautious on the markets till it saw some evidence of investment demand picking up.
Giving CLSA company were Morgan Stanley and UBS. In August, Morgan Stanley cut its year-end target for Sensex by 3 percentage points to 18,850, citing weak earnings growth. In September, UBS cut its year-end target for the BSE Sensex by 9.5% to 19,000 from its earlier projection of 21000.
The brokerage pointed out that FIIs outflows could pose a major risk to the Indian equities: If we see significant FII outflows, we believe Nifty/Sensex can correct further by 15-20% based on our bear case scenario.
However, the Sensex ended 2012 with nearly 25% gains closing around 19,500 levels. In fact, FIIs went into an overdrive in the second half of the year, shopping for equities worth more than $16 billion from July till December against net purchases of about $8.5 billion from January to June.
The brokerages were probably taking a cue from rating agency Standard & Poors revision of its outlook on Indias long-term rating from stable to negative in April. S&P had warned that there was a one-in-three chance of a downgrade to Indias BBB- sovereign credit rating, citing a weakening global economy, falling growth prospects and political paralysis as areas of concerns.
Nearly two months later, ratings agency Fitch downgraded Indias growth outlook to negative, citing restricted progress on the fiscal consolidation front. While the market did stabilise somewhat in July, there was more bad news to follow.
Between September and December, the BSE Sensex rose 11%. Unsurprisingly, foreign brokerages hurried to revise their targets for the benchmark indices. In the last week of November, ratings agency Moodys announced that it would keep Indias credit outlook as stable, saying the country had a high savings rate and its private sector remained competitive.
This announcement was soon followed by foreign brokerage Goldman Sachs upgrading Indian stocks to overweight from market-weight and setting a December 2013 target of 6,600 points for the 50-share Nifty index, which is about 11% upside from the index's current levels. The brokerage cited growth recovery and inflation moderation for its revised target.
Morgan Stanley, on the other hand, set a probability-weighted target of 23,069 for the BSE Sensex for December 2013, a 18% upside from current levels, citing a steady recovery in broad earnings growth.
September was the turnaround month, so to speak. The government kickstarted its reforms programme, hiking the price of diesel by R5 per litre and capping the supply of subsidised LPG. In November, it re-started its disinvestment programme in earnest and was on its way win a crucial vote to allow foreign supermarket chains to enter the country.
In the early part of the year, the general thinking was that there wouldn't be any change on the policy front. Then, all of a sudden, things began to start moving, said Andrew Holland, CEO, Investment Advisory, Ambit Capital.
Experts expect the positive sentiment to continue for a few months going into CY13. The expectation is that interest rates will come down soon, earnings will rise and growth will pick up in 2013, said Holland. Also, valuations for the market still look reasonable.
Holland conceded that it was a tough year for analysts as far as predictions were concerned given the gamut of positive and negative newsflow in 2012 both domestic and international. For instance, the year had begun well with the Sensex touching the year's high of 18,428 on February 22 and FII inflows of $5.1 billion in February, the most in the year.
However, the market could not hold on to the gains and slid to the year's low of 15,948 on May 23. Just as market participants were losing hope, a battery of positive global news came to the rescue in the form of announcements in September of a QE3 stimulus by the US Federal Reserve and a bond-buying programme by the European Central Bank.
Forecasting anything has become quite difficult given that we are increasingly living in a globalised world. Beside local concerns, analysts have to keep track of a host of global issues such as the economic outlook in the US and Europe, volatility in global crude oil prices and the geo-political situation in West Asia, Holland said.