Sky-high Sensex forecasts skip ground-level bumps

Rally restricted to big stocks; FIIs have hit investment caps in many large companies

Brokerages are falling over each other to revise their Sensex or Nifty targets. While Nomura has increased the target for the Sensex to 30,310 by August, 2015, Deutsche Bank and BNP Paribas expect the BSE benchmark to hit 28,000 by December this year. Some are going beyond the current financial year to build an air of optimism. Bank of America Merrill Lynch expects the markets to double in four years, while Morgan Stanley expects Sensex to be at 50,000 by 2020.

If consensus estimates are to be believed, the sky, indeed, is the limit for Indian equity indices. These estimates, aggregated forecasts by the investment community on where the markets could be heading, are supposed to reflect the collective wisdom of the market. But there are some in the market who are questioning such bullishness that discounts the risks.

RISKS TO THE RALLY

• FIIs' focus: Rally yet to be broad-based, as FII interest remains largely restricted to large-caps
   
• Caps: FIIs have hit investment limits in 21 stocks; headroom only 5% in 31 others
   
• Industrial activity: The September quarter is unlikely to be as good as the previous one for industrial production
   
• Fed scare: A US Federal Reserve move to increase interest rates in 2015 might cause turmoil in the markets

 

There are several factors that might put the brakes on the relentless rise in the benchmark indices, some analysts say. While the momentum of earnings growth is one aspect, the other factor could be foreign institutional investors having hit ownership limits in several sectors and companies.

With foreign ownership at an all-time high of 22.5 per cent of the market and 46 per cent of free-float, there is enough room for discomfort, as FIIs are close to their permissible investment limits in sectors like cement, private banks, government banks, automobile firms and consumer goods companies. Bank of America Merrill Lynch says the India overweight is at an all-time high for global emerging market funds and the consensus bullishness creates the biggest risk to markets.

Of the BSE-500 universe, 21 stocks are already out of bounds for FIIs, while 32 others have less than five per cent room for FII flows. Some might argue that there are plenty of other stocks left to buy but FII interest in Indian equities remains largely restricted to the blue-chips. In a September 2 report, Ambit Capital says: "With the crucial 7,950 resistance (for the Nifty) having been taken out now, it is critical for market breadth to improve for a healthy upmove to sustain. For the frontline index, however, upsides might be capped at 8,130 in the immediate term."

After the first phase of the rally, all attention has been centred on the earnings scorecard of corporate India. While the April-June quarter was better than expected, the July-September quarter might not be as strong. For starters, the rate of growth in core infrastructure sectors has moderated to 2.7 per cent in July from 7.3 per cent a month earlier.

Kaushik Das and Taimur Baig of Deutsche Bank Research expect industrial output in July to be two per cent higher than the same month a year earlier, compared with the 3.4 per cent year-on-year growth seen in June. The real economy might be showing some improvement when compared with last year, but the improvement has eased on a sequential basis.

Another little elephant in the room that nobody is willing to acknowledge is the imminent reversal in US interest rates in 2015. If the turn in the US monetary policy cycle causes severe disruption in the financial markets, Deutsche Bank says, it could spill over to the real economy and create a drag on growth. JPMorgan expects Indian equities to deliver returns of eight to 10 per cent through the end of the financial year. However, a reversal of global liquidity remains a risk to this assessment.

Analysts say, for the current bullishness to sustain, the rally has to be broad-based and reforms have to foster an environment conducive to higher growth.