 "HSBC ups Sensex target to 26k")
HSBC has increased its 2016 Sensex target to 26,000 from 25,000. The global brokerage believes India’s recent underperformance compared to Asian peers may not continue, as its valuations premiums have now narrowed to historic levels.
“India’s valuation premium to Asia has declined and is now approaching a 10-year average premium. The hype is almost gone,” HSBC said in a note co-authored by Asia Pacific equity strategists Devendra Joshi and Herald van der Linde. They added that India’s “underperformance will now come to an end.”
Asian peers witnessed a rebound from February. Between February 15 and April 21, MSCI Asia-ex Japan rallied nearly 17 per cent, in comparison the benchmark Sensex gained around 14 per cent.
According to HSBC, this was because India's relative valuations had soared. Also, the rebound in oil and commodity prices helped commodity exporters more than commodity importers like India. Further, overweight stance of global fund managers at the start of the year also weighed on the performance.
India has outperformed in the subsequent correction. MSCI Asia-ex Japan index is down around seven per cent since April end, while Sensex is down just two per cent.
Joshi and van der Linde say factors that will help Indian markets are improving domestic liquidity announced by the central bank; decline in foreign investor holdings and a normal monsoon year. High-frequency data suggests growth might improve in the second half of 2016, they say.
HSBC , however, says high earnings growth expectations is a risk for the market. “A risk is that consensus earnings growth forecasts are still too high at 17.5 per cent for 2016. We see moderate downside risk to these estimates, especially in consumer discretionary and materials. We think 9-10 per cent growth is more realistic,” the analysts say.
HSBC has upgraded its stance on the information technology sector to overweight, citing realistic earnings expectations and reasonable valuations. It has a neutral stance on Industrials. Meanwhile, HSBC has downgraded healthcare stocks to neutral on “high earnings expectations and rich valuations.”
“We remain overweight on consumer staples and utilities; neutral on energy and consumer discretionary; and underweight on financials (we prefer private banks), materials (very high valuations), and telecoms,” HSBC says.
The Sensex on Monday ended at 25,653.23, down 163.66 points, or 0.64 per cent. The Index is down two per cent so far in 2016.
