Fund managers expect rally to go on in 2010

The managers see Sensex trading at a P/E of 16

Managers of 23 fund houses, who collectively manage Rs 170,000 crore in assets, believe the benchmark indices, the BSE Sensex and the S&P CNX Nifty, will rise between 10 per cent and 20 per cent in 2010.

Fund managers expect the BSE Sensex to trade at a price-to-earnings multiple of 16.

A survey by Mumbai-based investment and brokerage firm JM Financial Services shows 45 per cent of fund managers expect the Sensex to consolidate in the first quarter of calendar year 2010 and rise in the remaining three quarters. The money flowing in is likely to come from domestic and foreign institutional investors (FIIs), but insurance money could also be a big driver for the next rally. So, the Sensex could move in a narrow band in calendar year 2010, with an upward target of 18,000.

Given the uncertainty surrounding the market on earnings growth and market valuations, the managers were asked for their expectations on the trend of equity market growth. The survey revealed a majority are optimistic and expect the equity index to rise. However the path to these positive expectations remains mixed.

For the first quarter, half the participants believed the index would consolidate, 18 per cent that it would fall and 32 per cent that it would rise. For the second period, between April 2010 and December 2010, the percentage of managers anticipating a rise in the index rose to 68 per cent, while 32 per cent believed it would consolidate.

The fund managers were also asked to quantify their sentiment in expected returns. The returns were divided in four categories — negative, less than 10 per cent, 10-20 per cent and above 20 per cent. Nearly 75 per cent felt the returns would be in the 10-20 per cent range, while 17 per cent believed these would be above 20 per cent in 2010. Only one manager felt the returns would be negative.

From the survey, it is evident the industry is quite bullish and expects the rally to continue, though with a slower pace. Fund managers expect the Nifty forward PE to remain high. About 75 per cent felt it would trade at more than 16 times FY11 valuations, while 13 per cent felt the FY11 PE multiple would be 14-16 times.

From the estimates of earnings per share for the Sensex for FY11, the Sensex’s expected range was between 12,000 and 18,000.