Downside risks for market still in play, says Ambit Capital

The European Central Bank’s (ECB) liquidity injection has boosted market sentiment, but a poor earnings season at home and a busy calendar for sovereign debt issuances in Europe is likely to drag down Indian shares in coming weeks, says Saurabh Mukherjea, head of institutional equities at Ambit Capital.

After losing a quarter of its value in 2011, the Bombay Stock Exchange (BSE) benchmark Sensex has gained 10.50 per cent in this year so far, making it the best performing stock index in the world. The 30-stock index closed up 81.41 points at 17,077.18 on Wednesday.

Overseas investors, one of the key drivers of Indian shares, have pumped in $1.36 billion (Rs 6,991 crore) this year till January 24, the Securities and Exchange Board of India (Sebi) data showed. They had withdrawn $357.80 million (Rs 2,714 crore) last year as high interest rates, governance deficit and corruption scandals soured investors’ mood.

“The ECB's liquidity intervention on December 22 is recapitalising the European banks through a back-door route. The banks are able to use these loans and lock in good returns by purchasing sovereign debt yielding six per cent,” said Mukherjea in an interview. “That really has changed sentiment globally and is driving the current rally. If the ECB replicates this event again in February, it will clearly take the risk (of the euro unravelling) off the table."

The ECB last month pumped $623 billion in three-year loans at one per cent interest in the banking system, reducing concerns about a credit crunch and helping to shore up demand in recent auctions in the euro zone. It is expected to hold a similar auction of unlimited three-year cash in February.

Mukherjea, who predicted last year that the Sensex would fall to 16,000, is sticking to his 2011 year-end target of 14,500 for the 30-stock index which he had set in August. The Sensex dropped as low as 15,135 on December 20, but has rebounded since then.

“We expect our target of 14,500 to remain in play in the first two months of this year. The results season is going to be brutal in India, particularly for banks, and the sheer volume of sovereign debt issuances in Europe in Q1 will keep European bond markets jittery," he said.

In the first quarter of 2012, gross debt issuances worth $300 billion are expected in Europe.