BackTargeting the targets: where equity forecasters went wrong
Directionally, forecasters of Indian equity may not have got it wrong, even if they misread the timing completely
Premium
Give a price target or a time target. Never give both together," joked Madhav Dhar, co-founder of erstwhile Traxis Partners LP, which he had set up with Barton Biggs and others, in a recent interview to a business news channel.
Given the way the year has panned out, equity analysts would have done well to take that advice. Not only has 2015 been a bad year for Indian equities, it has also been damaging for the most pedigreed of forecasters.
After a stellar year in 2014, when benchmark equity indices gained nearly 30%, most were predicting a further upside in domestic equities on expectations that the government will move rapidly to implement even politically difficult reforms such as the goods and services tax (GST) and the land Bill. The general assumption was that the positive sentiment resulting from those decisions along with a long overdue improvement in corporate earnings would translate into a 15-20% upside in the indices.
Based on this, Citigroup said the S&P BSE Sensex would hit 32,500 by December 2015; Nomura Financial Advisory and Securities (India) Pvt. Ltd was a bit more aggressive with a 33,500 target; and CLSA Ltd, which was extremely positive on India, kept their year-end target at 31,800. Some others like Ambit Capital Pvt. Ltd had a 36,000 target for the Sensex by the fiscal year end (March 2016).
For those tracking the CNX Nifty more closely, targets ranged from 10,219 by Barclays Capital to 9,500 by Goldman Sachs.
Most of these targets were given out at the start of the year and since then there has been a steady step-down in forecasts over the course of the year as realisation has dawned that the “bull case" for Indian equities may not play out as quickly as anticipated.
With about three months to go in the year, the Sensex is trading well below those lofty targets at near 26,000 levels; the Nifty is at sub-8,000 levels. That is roughly 15- 20% below the range predicted by these brokerages. For the year-to-date, the Sensex and Nifty are 6.4% and 5.4% lower, respectively.
Where forecasters went wrong was in estimating how quickly things will change—both in terms of government policy and corporate earnings. We now know that any positive change on both counts is coming in dribs and drabs at best. The implementation of GST, for instance, will likely miss the April 2016 deadline. Corporate earnings in the April-June quarter remained subdued with the only positive trigger coming from an improvement in margins due to lower commodity prices.
Put differently: the miscalculation was not on the potential for upside, but the probability of that upside potential being realised.
So what, you ask? After all, predictions go wrong all the time. That is true, but the problem is that a lot of foreign money came in based on these kinds of expectations and the patience of this money is wearing thin.
Foreign investors withdrew $2.6 billion in August, which came against the backdrop of turbulence across global markets. In September, foreign institutional investors (FIIs) have taken out another half a billion or so, which takes the year-to-date equity inflows to a mere $4 billion. Earlier this month, Mint reported that India had seen the third largest outflows in Asia (after Japan and South Korea) as global markets turned volatile following the devaluation of the Chinese yuan.
What this points to is the fact that Indian markets remain susceptible to outflows given the muted returns they have delivered to investors this year.
The good news is that there have been some balancing factors.
For one, FII flows into the debt markets have proved to be sticky this time around. Outflows here have been limited despite global volatility and so far this year, net inflows are at $6.4 billion. The number would have been higher if the limit to buy into government securities hadn’t been exhausted.
Other capital flows have been strong as well. Total foreign direct investment (FDI) flows into the country in 2014-15 were at $44.87 billion, up 23.3% compared to last year. The year 2014-15 also reversed two years of decline in FDI flows. In the first three months of the current financial year, for which data is available, a net of $12.47 billion has already come in.
Anecdotally, it appears that inbound mergers and acquisitions from strategic investors and private equity deal flow from investors remain strong. Going by that, it appears that the more patient capital is convinced that assets in India will appreciate based on an underlying assumption that macroeconomic and operational aspects of the economy will improve.
So, directionally, forecasters of Indian equity may not have got it wrong after all, even if they misread the timing completely.
Ira Dugal is assistant managing editor, Mint.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
