The government decision to push for bold reforms has enthused foreign brokerages, which on Monday scrambled to up their targets for India’s benchmark index, the Sensex. Leading broking firms such as Morgan Stanley, Citigroup, Deutsche Bank and Nomura have come out with positive reports on the Indian market performance. Most of them have revised their Sensex target upwards, on the back of global liquidity and improved domestic sentiment.
Morgan Stanley expects the market to climb to over 23,000 by December 2013. Citi, too, has raised its June 2013 target for the Sensex by eight per cent to 19,900, on the back of increased foreign flows. Deutsche Bank has set a near-term target (December 2012) of 20,000, over 10 per cent more than its previous target. Japan-based Nomura sees the market rallying in the near term; however, it hasn't revised the target.
“Conditions for a new bull market are getting slowly satisfied. The yield curve has stopped flattening, liquidity is improving, valuations appear supportive and profit margin expansion is a growing possibility in the coming months,” Morgan Stanley said in a report released on Monday. The US-based investment bank expects earnings to grow at 10 per cent in 2012-13 and 19 per cent in 2013-14.
|Index||Country||Dec 30, ‘11||Sep 17, ‘12||% change|
|Hang Seng||Hong Kong||18,434.39||20,658.11||12.06|
|Micex 1 0*||Russia||3,213.13||3,573.71||11.22|
|Shanghai SE Composite||China||2,199.42||2,078.50||-5.50|
|* As on 14 september; compiled by bs research bureau
In its report titled ‘Just what the doctor ordered’, Citi’s head of India research, Aditya Narain, said, “India has been under the weather but the recent fuel price (hike), FDI (foreign direct investment) and divestment reforms suggest the Doctor (Prime Minister Manmohan Singh) has finally/correctly diagnosed the problem, is administering the first bitter medicine dose (political opposition ahead: expect government to hold ground), though the patient (economy) will take time to improve. The direction/platform for policy making does appear to have changed. Equity markets should lead this change — though economic, investment and earnings growth could well lag these newer expectations.”
The Indian market, after a great start to 2012, pared some of its gains as investors had become wary due to the deteriorating macro economy and policy inaction. However, following the government’s back-to-back decisions of raising diesel prices and opening of sectors such as retail and aviation to FDI, coupled with stimulus announcement by the US Federal Reserve, positive sentiment has again revived.
Gaining for a ninth straight trading session, the Sensex on Monday closed up 0.4 per cent, or 78 points higher to 18,542.31 points, its highest close since July 25.
“The timing of India’s announcements has propitiously combined with the positive announcements from Europe and US central bankers, and will ensure that India does not miss out on the ongoing global risk rally,” said Abhay Laijawala, head of research, Deutsche Equities, in a report titled, ‘India gets its mojo back’.
The report says the Sensex at 20,000 would trade at a one-year forward price to earnings (PE) multiple of 14.8 times, about eight per cent lower than its past five-year trading average. Citi, too, believes given India’s growth, return and political decision making challenges, India will trade at lower target multiplies than its historical average of 15-16 times.
The Sensex, which has risen nearly 20 per cent since the start of this year, is currently trading at a one-year forward PE multiple of 14.7 times, says Bloomberg.
“Though the market is not cheap, it will likely rally near-term on global liquidity and improved domestic sentiment, in our view,” said Prabhat Awasthi, head of equity research, Nomura India. The report added that a discount in valuations to historical averages is warranted, given “much-lowered future trajectory of economic and earnings growth”.
The Indian market has already attracted significant portfolio flows this year. Net foreign institutional investor investment into Indian stocks has been $13.6 billion (Rs 69,000 crore).
“According to provisional data on BSE, FIIs on Monday net bought stocks worth Rs 2,252 crore, adding to Friday's purchase of Rs 2,800 crore. In past two trading sessions itself FIIs have pumped in close to $1 billion.”
The Nomura report highlights that the gains in the market would be capped due to the three macro economic headwinds of a worsening fiscal deficit, current account deficit and high inflation. “There are three key overhangs on the economy, which stand to only worsen in the near term with the rally in global commodity prices, following global quantitative easing,” it has said.