Sensex can dip 10% by Dec-end: Sanjay Mookim

Interview with India equity strategist, Bank of America Merrill Lynch

The S&P BSE Sensex reclaimed 29,000 levels on Wednesday. Sanjay Mookim, India equity strategist at Bank of America Merrill Lynch, shares his market outlook and investing strategy in this backdrop with Puneet Wadhwa. Edited excerpts:

What is your outlook for the markets for in the next 6-12 months?

Our house forecasts do not predict high equity returns in the near term. While we are structurally bullish on the emerging markets, the recent rally has led us to take a more neutral stance in the near-term. Our year-end target for the S&P 500 implies a downside, as does our target for the Sensex.

What is the downside you expect in these two indices?

Our calendar year-end target for the S&P 500 is 2,000; for the S&P BSE Sensex, it is 26,000.

What are the key threats or risks for the global equity markets that could take us back to the risk-off phase?

There are a few key concerns. First, increasing inflation in the US forcing rate increases, more than the near-term expectation of one hike in 2016. Second,  slowdown in China affecting the assumptions on demand. Increasing currency volatility and increasing the volatility in general (VIX levels are very low across many asset classes at the moment); and lastly, any reconsideration of Japanese monetary stance. It is difficult to assign probabilities, but any of these could have a cascading impact in a highly interconnected world.

How does India stack up on this backdrop?

India appears placed well to benefit from low commodity prices. The domestic reforms momentum is strong and the effects of some of these large changes should start showing up in a few years. If India is able to deliver de-coupled earnings growth, the market could de-couple as well. At the moment, correlations between the MSCI EM and MSCI India are very high. We do not have a model portfolio, but we argue in favour of consumption-related sectors over investment-driven ideas.

Is there money to be made in the mid- and small-cap segments over the next one year?

On headline, valuation premiums for mid-caps are at an all-time high, which would suggest that investment opportunities should be less evident going forward. However, we do not cover much of this space.

What’s your advice to someone who wants to invest with a year’s perspective? Is it a good time to invest or can they get stocks cheaper six months from now?

We argue that the current tide of global liquidity has lifted valuations to peaks. Valuations are an indicator of risk, and not of timing. We are worried, any global risk-off could lead to a correction in Indian equities. Investors looking to add at these prices should avoid liquidity and operational risks. Companies that continue to deliver operationally are preferred over firms where the investment case is based on hopes of a major change.

What are your key takeaways from the June quarter corporate earnings?

Not all companies have reported as yet. Our analysis of 150 companies suggested earnings were largely in line with expectations.

Do you think the markets have overdone the consumption cycle recovery theme?

The steady growth of domestic consumption should continue. There are several near-term catalysts that should propagate that trend (pay commission, better rains). Valuations, for much of this space, are high, but in the current environment, consumption remains a space where growth visibility remains relatively higher.

How do you see fortunes shaping up for the telcos? What should investors do?

Competition in telecom will remain high with the launch of Reliance Jio. Near-term pricing and margins will be affected. However, we argue that the current correction might be a good opportunity for long-term investors in the telecom space - for a select few names.

The infrastructure sector has also seen policy initiatives by the government recently. What are your thoughts?

Government spending on infrastructure has been limited largely to roads. There is little momentum yet in private sector capex or in real estate construction. The government’s efforts should continue within the fiscal constraints of the Budget. However, private participation is necessary for a broader recovery in the industrials space.