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| Sensex may slump after sudden surge |
| Rajhkumar K Shaaw & Pooja Thakur / Jun 01, 2009, 00:53 IST |
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Blanket buying post the election is likely to cap any major upward movement in the Sensex.
India's Sensitive stock index may extend its election rally by another 5 percent before slumping on earnings concerns, according to Kotak Securities.
The measure surged 17 percent on May 18, the first day of trading after the ruling Congress party's biggest election victory in two decades, and has held around that level to close yesterday at 14,296.01.
"I can't see it rising beyond 15,000 unless we see earnings upgrades over the next one year," Sanjeev Prasad, Kotak's head of research in Mumbai and the top-ranked analyst in Asia Money polls the past four years, said in an interview. "Blanket buying post the election outcome has happened. Now, for the markets to rise further looks a stretch." The index may fall to as low as 11,000 over the next 12 months, he said.
Shares in the Sensex trade at an average 14.8 times future earnings, up from their 2009 low of 8.83 on March 11, according to data compiled by Bloomberg. China's Shanghai Composite Index is valued at 17 times future earnings, Brazil's Bovespa trades at 10 times and Russia's RTS index trades at 6.8 times earnings, Bloomberg data show. The Sensex added 2.3 percent to 14,625.73 on Friday after economic growth exceeded forecasts, extending gains in 2009 to 52 percent. Asia's third-largest economy expanded 5.8 percent in the three months to March 31, the statistics office said. Economists were expecting a 5 percent increase.
Profit forecasts
India's analysts are unlikely to raise earnings estimates for companies other than state-run banks and some commodity companies such as oil producers and refiners, Prasad said.
"I'm not very sanguine the government will do a lot in terms of reforms," said Prasad, who's also executive director and co-head of institutional equities at Kotak Securities. "They didn't do much on infrastructure over the past five years and that was an area they didn't have any opposition from their communist allies."
Kotak Securities was ranked third for India research in the 2008 Asia Money polls. Prasad, 40, an engineering graduate from the Indian Institute of Technology in Delhi, oversees a team of 26 analysts covering 137 companies.
Overseas funds increased their total investments in stocks this year to $3.7 billion, according to the latest data from India's market regulator. Inflows accelerated on speculation the Congress government, with almost twice as many seats as the main opposition, may reduce barriers to foreign investment in insurers and retailers, plans that had been blocked by its former communist allies.
'Not very sanguine'
Some money managers remain optimistic. Investors should buy Indian equities when markets decline as the elections ensured a stable government that will be able to focus on economic growth, said Madhusudan Kela, equities head at Mumbai-based Reliance Capital Asset Management.
"Investors must buy on dips as India is in for the good times," said Kela, whose firm oversees $18.5 billion. "A lot of the good news on the expectations from the new government may be discounted in the immediate short term; markets will provide a correction to enter."
Prasad said interest rates may start climbing by the third quarter of the year, as the government steps up borrowing. The country's credit rating may come under pressure should the government fail to narrow a widening budget deficit, Moody's Investors Service said. India plans to borrow a record Rs 3.62 trillion ($76 billion) in the current fiscal year that started April 1 and estimates the budget shortfall at 5.5 percent of gross domestic product.
The authors are Bloomberg News columnists. The opinions expressed are their own
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