Changing stance: Global brokers get bearish on D-Street

Citibank latest to jump on the bandwagon, cuts Sensex target

Foreign brokerages which had earlier set aggressive year-end targets for Indian equities seem to be tempering their expectation.

On Thursday, investment banking major Citibank revised its December 2015 Sensex target to 32,000 from the earlier 33,000. It has joined global peers HSBC and UBS in adopting a less bullish stance, due to concerns on growth in corporate earnings.

The country’s benchmark indices ended marginally lower on Thursday. The BSE Sensex closed at 27,809 and the National Stock Exchange's Nifty closed around 8,420. The key indices, after having rallied as much as eight per cent in 2014, are up by less than two per cent in 2015.

“We see 2015 is turning out to be very different from 2014 for India investors. It is materially underperforming peers, has disappointed on both its growth trajectory and of earnings, has seen some days of outflows, and is feeling very over-owned. There is a perception that the government has got a little log-jammed in Parliament and the perspective is testing the faith of investors (which had) been liking it for quality, transparency, macro direction,”said Aditya Narain and Jitender Tokas, analysts at Citibank.

The investment bank said: “2014 was for the India believer” and this year is testing that faith. Having gained nearly 30 per cent, the Indian market was one of the best-performing in the past year. This year, however, India has underperformed its peers by a considerable margin.

Earlier this month, HSBC had downgraded the Indian market from ‘overweight’ to ‘underweight’, citing lower earnings growth and lack of room for further interest rate easing. In April, UBS had slashed the year-end target on the Nifty to 9,200 from 9,600, due to a poor earnings outlook.

Citibank said the market faces “five fundamental faith tests” but advised investors to “keep the faith” and introduced a June 2016 Sensex target of 35,000, about a fourth up from now.

The markets will be tested on earnings growth, high valuations, low inflation, foreign inflows and expectations from the government, it said.

It says earnings growth will be below expectations but a focus on quality would boost returns and result in higher earnings. Indian markets continues to trade at a relative premium to others. Citibank says this could justify a valuation of 16 or 17 times (one-year forward earnings), as interest rates are set to drop. It has, however, observed that lower inflation will fail to boost revenue and returns of corporate India in 2015-16.

Citibank has said foreign investor inflows will continue to dominate but domestic institutions, including mutual funds and insurance companies, will join the party.

On expectations from the government: “We see enough intent to believe the government is going to be more supportive of the economy and the market – and that should be a tailwind for businesses, stocks and the market.”

Gautam Chhaochharia, head of equities research-India at UBS, said although foreign investors had somewhat trimmed their India holdings, they continued to remain overweight on the market here. “The expectation remains hopeful and positive…our growth recovery will be gradual and mild and might, therefore, disappoint some investors,” he said.