Bears maul sensex on inflation concerns

Global financial majors, who until recently viewed India as a safe investment decision, are having second thoughts. UBS, in its latest India Market Strategy report, said domestic markets could fall further in the range of 10-15 per cent, and that the benchmark BSE Sensex could find support only at 15,000 points. This comes close on the heels of Bank of America Merrill Lynch predicting a flat year ahead for the Indian equity market on account of selling by foreign investors.

According to data available with markets regulator Sebi, foreign institutional investors have net sold Indian equities worth over Rs6,330 crore in January. This is the first time since May 2010 that FIIs have ended a month on a negative note. “We believe if we see $4-5 billion of FII selling, then Indian markets can correct another 15%,” said UBS in a strategy report released on Monday.

“We believe that while higher inflation may be partly priced, we are yet to see significant selling by FIIs yet,” said UBS. “We believe that earnings estimates for the Sensex and Nifty could be revised down in the coming months. Assuming some downward revision of around 5% (implying 12.5% FY12 earnings growth) and applying a 12.5x P/E multiple we feel that Sensex and Nifty should find support at 15,000 and 4,500, respectively,” it explained.

This hardly comes as good news for investors, waiting for a rebound by domestic markets that have been in freefall over the past five sessions. Tuesday was no different, with the 30-share Sensex falling below the psychological 18,000-mark during intra-day trades, before ending the day at 18,022.22, down 305.54 points, or 1.67 per cent. In the last five consecutive sessions, the Sensex has shed 1,129 points.(Click here for the graph)

The broader S&P CNX Nifty of the National Stock Exchange lost 88.70 points to settle at 5,417.20 points.

Foreign majors say that while the Indian market has been losing ground on concerns related to inflation and high crude oil prices, the scenario could get worse with FIIs exiting in larger numbers. In the last one month, the total market capitalisation lost is pegged at Rs8,65,584 crore.

UBS is not alone is predicting a bearish outlook for the Indian market that saw a record FII inflow of nearly $30 billion in calendar 2010. BofA Merrill Lynch, on Monday had said there is a possibility of further de-rating of the Indian equity market.

“My guess is that the Sensex will go below the long-term P/E in the next three to four months,” said Jyotivardhan Jaipuria, head of India research at BofA Merrill Lynch. “We got record FII inflows of $29 billion last year and some of that may start to reverse,” he added.

“We believe that the markets may continue to remain weak in coming few months as FIIs could emerge bigger net sellers in the coming weeks leading up to the Indian Budget (to be presented on Feb 28),” UBS summed up.