4 reasons why BofA-ML is cautious on Indian markets

Sensex may have risen nearly 9% year-to-date, global brokerage Bank of America-Merrill Lynch sees the index to fall in near-term from the current levels. The recent sharp rally has turned the valuations rich, while the headwinds on earnings front owing to residual overhang of demonetisation and deferral of GST implementation to July from April may keep the investors on edge, BofA-ML said. 

“While we expect longer term business cycle to improve in next 2-3 years, we see near-term returns capped from hereon due to 1) possible near-term reversal of global wave, 2) market’s under-appreciation of residual impact of demonetisation, 3) rich valuations and 4) continued risks of earnings downgrades,” said the brokerage in a research report. 

BofA-ML expects 29,000 level on Sensex with limited upside by December-end. The 30-share index has added over 2% in the last five sessions and was trading at 28864 in today’s trade. 

The index is just 4% away from its all-time high of 30,024, which it hit on March 04, 2015. BofA-ML noted that the recent sharp rally has taken the market again into expensive territory, and expects it to either fall in near-term or time-correct.  

“Sensex 12-month forward price-to-equity (PE) of 17X is 31% above its long-term averages. At these multiples, markets have historically struggled to deliver positive return over the subsequent 12-months,” said the brokerage. 

The brokerage sees 5-7% downgrade for Sensex aggregate FY18 earnings per share (EPS). BofA-ML further pointed out that market may have looked through the impact of demonetisation, earnings have not reflected the full impact so far. The brokerage, therefore, is underweight on discretionary sectors. 

Additionally, rollout of the GST in Q2FY18 could further bring earnings uncertainty adding pressure on the markets.