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Benchmark returns of Indian markets may remain muted in 2019: BofA-ML

Indian benchmarks will find it difficult to stay resilient in the face of global weakness

Sundar Sethuraman  |  Mumbai 

The brokerage said that domestic flows may not be enough to protect India from any global sell-off, especially in large-caps. It added that analysts' estimates of a sharp earnings bounce-back doesn't give a true picture of growth concerns
The brokerage said that domestic flows may not be enough to protect India from any global sell-off, especially in large-caps. It added that analysts’ estimates of a sharp earnings bounce-back doesn’t give a true picture of growth concerns

The benchmark returns of Indian markets are likely to remain muted in 2019. The foreign brokerage Bank of America Merrill Lynch (BofA-ML) has pegged the year-end target for Nifty at 11,300, which is just 4.6 per cent higher than Nifty’s Tuesday closing.

The brokerage is of the view that markets will find it difficult to stay resilient in the face of global weakness.

Globally, central banks are cutting down on liquidity infusions and according to the brokerage, this is likely to adversely impact emerging markets (EMs) including India.

The note added that Indian markets have closely tracked those of EMs for a long time. “And the resilience that investors seek from Indian markets against a global sell-off is unlikely to happen,” it said.

The analysts at the brokerage say that deteriorating global macro factors or lower liquidity is likely to affect India just like other EMs.

The brokerage also pointed out that analysts’ estimates of a sharp earnings bounce-back doesn’t give a true picture of underlying growth concerns.

“More than 70 per cent of the forecast NIFTY EPS growth comes from four stocks — HDFC Bank, ICICI, SBI and Reliance Industries — which have less than 27 per cent weight in the index. The NIFTY EPS — excluding these four — is forecast to grow only 12 per cent in FY20.

Besides, Indian analysts’ forecasts are known for being over-optimistic — Indian earnings have almost always been downgraded other than for 2009,” said Sanjay Mookim, India equity strategist at BofA-ML.

The current consensus forecasts by analysts imply Nifty’s earnings per share (EPS) growth at 24 per cent in FY20.

The note added that domestic flows may not be enough to protect India from any global sell-off, especially in large-caps.

“Most of the institutional flow has been absorbed by supply. Domestic flows have not led to any major decoupling of Indian equities so far,” Mookim said.

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Meanwhile, the brokerage said that fiscal deficit, which is closely watched by foreign investors, faces risks of widening.

“The government’s headline fiscal deficit has fallen significantly over the last few years — from highs of more than 6 per cent (though real deficits then might have been higher), to under 3.5 per cent now. The FY19 budgeted deficit of 3.3 per cent is at risk on account of lower-than-expected goods and services tax revenues and likely slippage on disinvestment,” the note said.

The brokerage said it is bullish on rural and financial stocks. With elections around the corner, there is a reasonably high probability of a fiscal stimulus focused on the rural, farming population, the note added.

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On banking stocks, the brokerage said that distress caused by large NPAs is mostly over and banks should benefit from the likely market share gain by non-banking financial companies.

2019 outlook

  • Deteriorating global macro or lower liquidity is likely to affect India just like other Ems
  • Globally, central banks are cutting down their liquidity infusions
  • The current consensus analyst forecasts imply Nifty’s EPS will grow 24 per cent in FY20
  • Fiscal deficit, faces risks of widening going ahead
  • Bullish on rural and financial stocks

First Published: Wed, January 09 2019. 00:44 IST
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