Where can mkts go from here?

Top brokerages are finding the Sensex fully valued and stock-picking difficult

The earnings season has ended without any downgrades because profits of India’s top 30 companies have grown at 12.7 per cent year-on-year, which is ahead of the nine per cent estimated by experts. However, if one excludes the earnings of State Bank of India, then Sensex earnings have grown by eight per cent. So, it's not surprising that most strategists have a cautious stance on the market, as all’s not well.

That there are no further downgrades is a positive, but nobody’s talking of upgrades in earnings either. Earnings growth expectations for FY13 and FY14 still remain in the single digit territory. Kotak Institutional Equities says: “We find valuations of the market (BSE 30 Index) full at 14.7x FY13 EPS (free float basis) and 13.2x FY14 EPS in the context of low earnings growth (7-10 per cent) for both years."

If the market is “fully” valued at this point in time and there are no upgrades in earnings, what are strategists recommending? Given that consumer stocks are expensive and cyclical stocks are headed for a big rally, most strategists are struggling for stock ideas. Many brokerages are advising clients to sit on higher amounts of cash as there seems to be a “drought of ideas”.

Even the eternal optimists are now beginning to realise that there are several aspects to India’s slowdown, and not all of these can be blamed on the government. Before each review of the monetary policy by the Reserve Bank of India, rate sensitives and infrastructure stocks rally on hopes of a rate cut. However, it’s now becoming apparent that the investment cycle has slowed, not purely due to high interest rates but also because there is a structural slowdown in investments. According to CLSA, the debate on India’s investment slowdown ignores cyclicality, which is one of the major causes. The brokerage says: “Policy paralysis has only prolonged the problem. Excesses that emerged over FY04-08 due to easy liquidity, are unwinding. Potential improvements in government policy action will help but the process of cyclical correction, though healthy, will be painful.”

With very few sectors doing well and others showing no sign of revival any time soon, stock picking has become even more difficult. Given that Q1 has few surprises as far as performance of sectors is concerned, analysts expect this trend to continue. BNP Paribas expects FMCG, pharmaceuticals, IT, auto and ‘consumer proxy’ banks to have stable or improving earnings estimate trajectories.