Merrill sees Sensex at 7000 in 12 months

Despite volatility, the market sentiment continues to fly high with fund managers holding that the Bombay Stock Exchange (BSE) Sensex will shrug off the current round of weakness and record stronger earnings growth in the next 12 months.

In its latest survey of fund managers, DSP Merrill Lynch forecasts the Sensex touching 7,000 in the next 12 months, driven primarily by earnings growth.

But in the short term over the next one month, fund managers expect the Sensex to be range-bound, with the most bullish estimates at 6,200 and the least bullish estimate at 5,500.

The survey for February 2004 was conducted between January 1 and February 3 of 10 fund managers, managing assets of more than Rs 13,100 crore.

Andrew Holland, executive vice-president of DSP Merrill Lynch, said the bullish forecasts are not too surprising, given the fact that a lot of public issues are expected to hit the markets in the near future, and also because of the upcoming elections.

"So there will be volatility and the market will move in a trading range in the short-term. Thereafter, with strong earnings growth, the market is seen moving towards 7,000."

"While the one-month Sensex target was spread in a wide 5,500-6,200 range, 50 per cent of the respondents expected the market to be at the 6,000 level. Over a 12-month horizon, 60 per cent of fund managers expected a range of 7,000-7,600 points, with 30 per cent expecting the Sensex to be at 7,000 points. DSP Merrill Lynch said its own Sensex target is 6,500 for December 2004," the survey said.

Compared to the past surveys, which estimated a 12-month target of 6,500 points, the latest survey is more optimistic.

The reason is that investors have become more excited about the longer-term prospects, and also about the earnings and economic growth prospects.

According to the survey, 80 per cent of the fund managers believe that markets are fairly valued. But all of them believe that the dominant driver for the equity markets will be a change in earnings. But this target of 7,000 could move further up in the coming months.

Holland said, "Over the next six months, once elections are out of the way and the reforms process continues, you will see earnings continue to beat market expectations and I would expect that 7,000 figure to move higher. We are very bullish over the next two years."

On equity valuations, fund managers feel the market has been fairly volatile in the last one month and market participants expect it to be range-bound in the run-up to the elections.

Now that the vote-on-account has been passed, marketmen said that the only drivers to the market would be anticipation of the next quarter or annual results of the corporate sector.

Interestingly, fund managers were bullish on automobile and metals and bearish on the fastmoving consumer goods and pharmaceuticals sectors.

But fund managers' view on technology and cement stocks remains divided. Majority of fund managers expect growth stocks to outperform value stocks, large-cap stocks to outperform small-caps and cyclicals to outperform defensive stocks.

Despite large inflows into equity funds, cash levels were at their lowest in the last year. Eighty per cent of the respondents held between zero-three per cent in cash. Two-third of the fund managers were underweight-to-neutral on cash.

Moreover, fund managers hold a bearish view on interest rates over a 12-month horizon, and expect rates to be slightly higher.

Likely arguments for this forecast could be the improving economic outlook coupled with the fact that interest rates are at near historic lows.