16,000 is worst case scenario for Sensex: BoAML

Says India is vulnerable if foreign investors decide to sell their global emerging market assets

The BSE Sensex, an index whose performance is said to reflect the market, can drop over 2,000 points or over 10% in the worst case scenario.

Bank of America Merrill Lynch pegged the level at 16,000 in case recent negative sentiment persists, according to a report entitled ‘India: How bad can things get?’

“The market is trading slightly below the long term average forward (price-to-earnings multiple) of 14.1x. However, at its low, the market tends to go to 10x whenever there is a global crisis. Given that the developed world is recovering, we are assuming current valuations for the export companies and…(lower valuations)…for the rest of the universe. Based on this we get a stress case index level of 16,000 for the Sensex,” said the 29th August report authored by research analysts Jyotivardhan Jaipuria and Anand Kumar.

It highlighted the high foreign institutional holding of Indian companies, at 45% of the total shares available to the public. This would mean that India is vulnerable if foreign investors decide to sell their global emerging market assets.

Policy measures to help the falling rupee such as the issue of quasi-sovereign bonds or bonds for non-resident Indians could lead to a rise in the rupee which in turn could also help markets, added the duo.