Hope amid sombre market mood

Many experts expect Sensex to settle around 17,000.

When the Bombay Stock Exchange Sensitive Index, or Sensex, loses 3,500 points, or 16.9 per cent, in slightly over three months, the market mood cannot be upbeat.

The Sensex continued its downward rally on Thursday. It closed at 17,463 points, down 129.7 points (0.7 per cent) from yesterday.

But market experts said things should start settling down soon. Said Gul Teckchandani, investment consultant, “Markets go up in steps and come down in an elevator. But the elevator has to stop somewhere. I think the worst is over.”

His optimism is supported by other market experts, including Citi analysts Aditya Narain and Jitendra Tokas. In their latest report, titled ‘Headwinds, not a head-on crash’, they said: “We believe the current market conditions present a good opportunity to buy some decent Indian stocks.”

According to them, the headwinds are macro economy, misgovernance, money (large foreign inflows yet to flow out) and mood (it’s bad). But they are counting on the last decade's growth and possible tailwinds. These include eight-plus per cent growth (after downgrades), 25-plus per cent government revenue growth, relatively safe 15-plus per cent earnings growth, more reasonable valuations (below long-term averages) and under-performance.

Indian markets have fallen 19 per cent vis-a-vis MSCI World’s fall of 12 per cent in the 35 days since the beginning of the year. “We probably appear a little brave maintaining our 22,000 Sensex December 2011 target (+25 per cent from here), but believe the rewards outweigh the risks decisively from here,” says the Citi report.

Concerns, hope
Yet, there are concerns. There are earning downgrades because of inflationary pressures. Certain sectors, impacted by high inflation and interest rate movements, might be adversely impacted. But the Citi report says earnings growth in 2011-12 should continue to be above 15 per cent.

Andrew Holland, CEO-equities, Ambit Capital, said another big issue with the market mood was lack of buyers.

“At present, investors fear that if they enter the market and there is bad news, they could lose 20 per cent in a day. Once this phase passes, people will start looking at individual stocks that have been hit too hard.”

Other market veterans agree with Holland. “Another two-three per cent correction would mean many frontline stocks will be available at single-digit P/Es,” said Motilal Oswal, chairman, Motilal Oswal Financial Services.

Some felt that though the probability of the Sensex slipping to 16,000 points was the worst-case scenario, the threat was coming down, with improvement on several fronts. “There are a number of positive changes in recent times,” said Rakesh Arora, head-research, Macquarie India.

The main changes include the reduction in the possibility of oil shocks, improvement in the political scenario as the government seems to be agreeable to a joint parliamentary committee probe into the telecom scam and chances of investment picking up because the environment ministry has started giving clearances.

U R Bhat, managing director, Dalton Capital Advisors (India), said: “If the worst-case scenario is played out and the Sensex were to fall to around the 16,000-level, I expect a lot of value buying to emerge from HNIs (high net worth individuals), domestic institutions and FIIs (foreign institutional investors) who missed out in 2010.”