Mkts likely to fall before Budget: BoA Merrill Lynch

Contrary to general belief that share prices will rise ahead of the Union Budget, the expectation is that they will fall further due to the expected withdrawal of some stimulus measures, according to foreign brokerage Bank of America Merrill Lynch.

The brokerage expects single-digit returns from the Bombay Stock Exchange’s (BSE’s) Sensex with year-end target of 18,000. The Sensex has fallen almost 8 per cent in the last seven trading sessions due to global liquidity tightening.

“The market usually rises ahead of the Budget, but this time we expect a pre-Budget correction,” said Jyotivardhan Jaipuria, managing director and head of research at Bank of American Merrill Lynch in India.

The government had reduced excise and Customs duties on various products to revive the economy following the global economic downturn. On outlook for 2010, Jaipuria said economy and earnings would rebound, but valuations in India, at 17 times earnings, were not cheap. He said global liquidity would be the key driver along with government policies.

On disinvestment in public sector companies, the brokerage economist, Indranil Sen Gupta, said this would reduce the fiscal deficit and was a must for the government. But Jaipuria said the huge supply of paper (follow-on-issue and initial public issues) might cap the rallies.

Bloomberg reports: Indian stocks were downgraded to “underweight” from “overweight” at Credit Suisse Group AG, which said valuations were unattractive given the chances of rise in interest rates. Indian shares traded at a 3 per cent premium to Asian equities based on a model that valued companies’ net assets and return on equity, Credit Suisse analysts led by Sakthi Siva wrote in a research report today. That compares with a 25 per cent discount for China’s Hong Kong-listed stocks, according to data compiled by Credit Suisse.  “There appears to be less tightening risk priced into India,” Siva wrote. The market “looks less exciting from a valuation perspective.”