Tuesday, May 19, 2010 was a sentiment-changing day for the Indian markets. News from the euro zone wiped about 470 points off the Sensex, which was hovering around the 17,000-mark a day before. It spread a lot of gloom across the globe and made us realise that difficulties in developed economies will have a damaging impact on us no matter how hunky-dory things appear back home. To get the pulse on the markets and clarity on the trajectory ahead, FE spoke to the broking community at length to get a feel of the current sentiment.
Most market experts were bullish. Not so surprisingly, the experts we spoke to post-May 19 were more cautious than the ones interviewed a day before. However, most were unanimous about the India Growth Story being intact, but were worried about the worsening economic situation globally, especially in the Europe.
A majority of them expect the markets to go up from here, but didn?t rule out minor corrections on the way up. ?You will have corrections on the way but we are bullish,? said Pathik Gandotra, MD and head of research, IDFC Securities. Piyush Garg, chief investment officer, ICICI Securities, agreed with Gandotra. ?There could be further 4% correction before the 10% surge.?
Gandotra expected the Sensex to scale the 20,000 level before March 2011 but warned of three headwinds. ?If anything further happens on the EU front there could be a setback. Also, an impact on insurance flows could spell a huge negative. The third risk is the monsoon.?
Brokers who were bullish had the year-end Sensex targets at 19,000-20,000 while the ones worried about euro zone concerns also expected the possibilities of the index slipping to 14,000-15,000 on any adverse conditions.
?We expect the Sensex to stay in the 15,000-19,000 range for the whole of this year,? said Andrew Holland, CEO (equities), Ambit Capital. ?We are pricing in a lot of growth globally as well as in India. Valuations will have to come down as this growth will not be as much as people are expecting,? he added.
Most brokers are of the view that current valuations are reasonable ? neither cheap nor expensive. However, they are pointing at one-year forward earnings which are looking attractive.
?The market is at 16.5 times of the FY11 earnings and 13 times of FY12. We don?t expect the market to trade below 15 times of FY11 earnings in any situation,? says Gandotra, who expects FY11 Sensex EPS to be around Rs 1,032. According to Bloomberg consensus estimates, EPS in FY11 would be Rs 1,040.
However, most respondents feel things are still sound fundamentally for the Indian economy and the European crisis could only impact certain pockets like exports. But that won?t impact the GDP growth estimates in a major way. ?There is no reason for the Indian markets to fall. Maybe the fall will continue as there is a lot of pessimism, but all domestic indicators are looking good,? says Apurva Shah, vice-president and head of research, institutional equities, Prabhudas Lilladher.
What will be the key inflection points for Indian markets? Respondents feel it will be stability in Europe, good monsoons and first quarter numbers. ?We are looking at these two triggers ? normal monsoons and first quarter results ? both will be out in July. That should again set a positive tone for our markets,? says Garg.
?Europe is too big a problem to be ignored,? says Holland. There has to be stability in Europe, for our markets to move higher, he feels.
Inflation is not a big concern for the brokers. Pure base effect is expected to pull inflation numbers down. ?We are not worried about inflation, we feel inflation rates will come off to 6-7% in the next six months and 5-6% in a year,? said a broker on the conditions of anonymity. The problems in Europe, coupled with the expected tightening in China to combat inflation, will keep the commodity prices low, he feels. With crude prices coming down, inflation is also expected to go down, which will have good impact on the interest rates.
Most brokers were positive on banks, capital goods, infrastructure and companies that are domestic consumption-driven. ?The domestic consumption story is moving on and corporates are going for capex. So this year, we expect over 20% credit growth and banks should do well,? says Abbas Merchant, assistant vice-president (research), Jaypee Capital Services. ?For any business that is completely based in India, domestic consumption story will be a safe-haven,? says Holland.
Almost all experts were negative on the telecom space while a majority were also negative on commodities and real estate. ?Real estate is one sector where a lot of pain is still left,? says Garg.
The European debt crisis has been spooking the markets over for some time now. The Sensex had plunged to below 16,000-levels in early February on Euro zone concerns. However, strong foreign investor buying and bullish sentiments ahead of the fourth quarter earnings resulted into a sharp pullback, which helped the index gain for nine-straight weeks to close near 18,000 on April 7.
However, with the crisis in Europe deepening, the markets didn?t stay at these levels. Within a month the Sensex again fell to sub-16,500 levels. Indian equities have traded in a narrow range in 2010, unlike last year when the markets gained over 71%. For the FE broker poll, research heads and CEOs of the top broking community were interviewed extensively which included questions like when is the next 10% correction likely to happen, the key inflection points for the market, opinion on valuations and sectors they are positive on. None of the brokers were informed that their opinions are being aggregated for a poll.