Mumbai: Better-than-expected June quarter earnings by Indian companies, signs of a global economic recovery and a comfortable liquidity situation are making an increasing number of global brokerages bullish on Indian equities. Steep valuations and a deficient monsoon will, however, cap further upside for the markets in near term.
In its mid-year outlook released on Friday, Merrill Lynch’s global analysts said the recession is over and better days are ahead for equity markets.
Jyotivardhan Jaipuria, managing director and head of research (India) at DSP Merrill Lynch Ltd, is, however, asking his clients to sell the rallies in the near term. “Corrections are likely. After the Budget, we had one, but despite that we are up nearly 100% (from lows). Will we make another 100% in the next 6-12 months? I don’t think so,” he said.
JPMorgan Chase and Co. analysts Adrian Mowat and Bharat Iyer, in a report released on Friday, said they have upgraded India to “overweight” status from “neutral” in their regional model portfolio.
Drought worries: Analysts say a slowing monsoon is one of the major threats to India’s growth, considering the high contribution—nearly 18%—of the agricultural sector to the country’s gross domestic product. AFP
“Investor sentiment has improved significantly over the past quarter,” Mowart and Iyer said, attributing this to the result of the national elections, positive global cues and economic indicators that suggest vast improvement in domestic growth momentum.
“Additionally, Q1 FY10 earnings performance indicates that earnings growth momentum is resuming after two quarter of decline,” they said.
Earlier this week, Credit Suisse Group AG had upgraded its target for the Sensex, India’s benchmark equity index, to 17,000 points, saying revival of corporate earnings cycle and the quantitative easing by the central bank will help equity markets’ growth.
The Sensex has rallied 57.14% since January against the Dow Jones Industrial Average’s rise of just 5.4%. Analysts are concerned that the valuation is running ahead of the fundamentals. In past two days, the index has lost 743 points, or 4.68%, on growing concerns about failing monsoon and a heavy bout of profit booking by investors.
However, brokerages are not worried yet. Dinesh Thakkar, chief of Angel Broking Ltd, a Mumbai-based domestic brokerage firm, said: “The correction should not be taken as part of a longer downturn unless it sustains. There is lot of money waiting in the wings.”
According to him, if the market drops another 10% from these levels, it would be an attractive buying point.
Stephen Corry, director and head of investment strategy (global wealth management) at Merrill Lynch (Asia-Pacific) Ltd, is bullish on equity markets, but even he felt that for India, relative valuation is a concern.
“There are no major concerns on India except in relation to other emerging markets. India is, in fact, trading at a 40% premium to emerging markets, while the historic premium is around 25%,” he said.
Globally, Corry is advising clients to lower their cash positions. “We are recommending increased allocation to equities. Earnings are beating analysts’ expectations, but they are beating analysts’ expectations by cutting costs. But they can only cut costs so much. Going ahead, we are looking at more top line revenue growth.”
Corry is advising an asset allocation of 50% in stocks, 45% in bonds and 5% in cash.
According to DSP Merrill’s Jaipuria, the scope for upgrading the valuations is limited as the Indian market is already trading at a premium on FY10 earnings. “Valuations are no longer cheap at around 16.5–17 times; this is more than the long-term average of around 15 times. Markets are being supported by global liquidity and increasing earnings upgrades.”
“Slowing monsoon is one of the major threats to the growth. Given the high contribution (18%) of agriculture to the GDP (gross domestic product), a failure in monsoon could hit our growth forecasts of 7%,” Jaipuria said.
Other concerns include the return of inflation later in the year and a revival in primary market activity, with lot of qualified institutional placements (QIPs) and initial public offerings lined up.
At least 60 companies have board approvals for QIP issues totalling nearly Rs75,000 crore, according to Bloomberg data.
The biggest positive for the Indian markets, according to Jaipuria, is global liquidity. “We have that in plenty. When US pumps in liquidity, the emerging markets benefit more than the US markets.”
Nilesh Jasani, head of research (India) at Credit Suisse, had early this week said the Sensex could dip 15-20% from its present level around the end of this year because of factors such as monetary tightening, regional or global market corrections, reform disappointments, primary market issuance pressure and fiscal deficit worries.
While these factors could cause equities to fall for a few months, Jasani believed the Sensex would return to 17,000 by mid-2010, provided none of these factors dealt too serious a blow to the growth outlook.