Sensex to stay flat in 2011, says BofA-ML

Bank of America (BofA) Merrill Lynch expects flat returns for the Bombay Stock Exchange (BSE) benchmark, the Sensex, in calendar year 2011, as foreign institutional investors (FIIs) are expected to reduce their exposure to Indian stocks.

The 30-stock index, which ended 2010 at 20,509, has lost a little over 10 per cent since the start of this year and closed at 18,327.76 today.

“In the short term, a combination of macro headwinds like inflation and rising interest rates will lead to de-rating of the Indian market,” said Jyotivardhan Jaipuria, head of India research at BofA Merrill Lynch, during a press briefing. “We will get some jitters in the early part of the year.”

He says the Indian stock market is vulnerable to selling from investors abroad. “We got record FII inflows of $29 billion (Rs 1.32 lakh crore) last year. Some of that may start to reverse,” said Jaipuria.

Net sales of Indian shares by FIIs have been $1.05 bn (Rs 4,800 crore) in this year so far, according to data available on the Securities and Exchange Board of India (Sebi) website. This will be the first monthly outflow from investors abroad since May 2010.

Indranil Sen Gupta, director and chief Indian economist of BofA Merrill Lynch, expects FIIs to invest $16 bn in Indian equity and debt combined in the financial year ending March 31, 2012.

At least a third of the FII inflows in 2010 might have come from exchange-traded funds, according to Jaipuria. “Some of this money could be short-term, which may go away,” he said. Jaipuria said the Indian market would attract more money from long-term investors if it corrects over the next six to nine months.

The Sensex was trading around its long-term average price-to-earnings (P/E) multiple after the recent correction, but there was a possibility of it going down further, Jaipuria said.

The long-term average P/E multiple for the Sensex is around 15 times.