The recent 5.3% surge in markets has caught the market by surprise. FE survey of top fund managers and brokers finds that softening of oil prices has made them bullish on Indian markets with some even expecting the benchmark index to go past its all-time closing high of 21,004 for Sensex by end of this year.
?The recent decline in global commodity prices against a backdrop of tepid economic growth of developed economies may turn out to be good for emerging markets including India and China,? said Andrew Holland, CEO-equities at Ambit capital.
Higher inflation concerns in the emerging markets as well as fears of crash landing by chinese economy had led to lower equity inflows into emerging markets including India from wary global investors.
For the year till date, foreign investors have bought just $98.6 million worth of equities which is 98% lesser than flows seen in the similar period of last year. In terms of performance, India is worst performing market globally (-7.7%) after Brazil this year.
Nomura recently changed its bearish stance on the Indian market citing reasons of economic headwinds starting to recede. ?While growth has been a casualty of increasing rates and policy procrastination, we are encouraged by slower growth as it eases pressures on India?s supply-side constrained economy,? said Prabhat Awasthi, head of equity research and MD of Nomura Securities. Nilesh Shah of Axis Bank said the recent rally was due to the valuation advantage after Sensex fell below 18,000. At these levels, market had factored all the near-term headwinds that the investors were wary off, he said.
Nomura report said Sensex was trading at a 17% discount to their average valuation over five years, indicating the market has priced in significant risk. Sensex companies are quoting at a one-year forward price to earning ratio of 14.9 against historical average of 15.5.
?Valuations definitely turned attractive when the Nifty was near 5,300 levels also with lot of counters experiencing overselling.,? said Piyush Garg, CIO, ICICI Securities. Fund managers found current market valuations to be fairly valued. ?Returns are now likely to be driven more by earningsgrowth than a change in valuations. While earnings may be muted in the near term due to higher commodity prices, over time, companies should be ableto pass on input prices as well as improve productivity? said Prashant Jain, CIO of HDFC Fund.
Sunil Singhania, head equity at Reliance Mutual fund, said: ?Markets will remain range-bound over the shorter term but with a positive bias.? Technically, fund managers expect Nifty to find resistance at 5,750 on the upside while it finds support at 5,400 over the shorter term. However for the calendar year 2011, mbrokerages including Citi, Morgan Stanley and Deutsche bank have higher price targets of 21,000 plus for Sensex, which represents atleast 13% upside from the current levels.
?Given that India’s interest rate cycle may be getting closer to its peak, there is a likelihood of good performance by interest rate sensitive sectors like Auto and Banks ,? added Holland The fund managers are keenly watching the commodity prices. ?Decline in commodity prices may turn beneficial for emerging markets including India, given the inflation growth trade off it enjoys compared to developed economies? said shah. Holland didn’t rule out the possibility of oil prices reducing further by $10-15 per barrel if the geo-political tensions in Libya cool off.
?The spectrum of growth for developed economies range in at about 2% against the inflation array of 4%. India definitely looks better placed with both, the inflation as well as growth standing at about 8%,? said Shah.