European investors who are focussed on global emerging markets are increasingly becoming positive on the Indian equity markets. According to the latest India market outlook by BNP Paribas, investors are looking at stock ideas that would deliver good returns in the long term even as the Indian markets battle short-term headwinds.
"GEM investors are getting incrementally positive - on a few fundamentally sound stocks that have underperformed the market significantly," says the BNP Paribas report by Manishi Raychaudhuri and Gautam Mehta.
"These long term investors believe that investing in some of these stocks now would lead to good returns over the long term, notwithstanding where the market heads in the near term. It seems unlikely that these investors would rush in to buy right now, as their concerns about the market are still significant - but they are more positive than when we met them late last year," it explains.
According to the global financial major, the biggest concern among investors is the combination of persistent high inflation, potentially high fiscal deficit (which could be aggravated by high oil and other commodity prices) and their impact on interest rates and crowding out of private investment. Sensitivity of fiscal and current account deficits to oil prices were discussed repeatedly, say the analysts.
Investors are also worried about the downside risk to earnings estimates and sectors that could contribute to such downgrades. However, any resolution in the Middle East geopolitical tensions and the subsequent moderation in oil prices could lead to a significant re-rating of the market.
BNP Paribas is of the view that metals, cement, consumer staples and construction contribute to 25-30% of market's earnings, which implies 2.5-3% downside to earnings estimates. "Thus FY12 EPS could settle at Rs 1,220-1,225 and applying a 13 times PE multiple, it could mean a 'worst case' Sensex level of 15,500-16,000," says the report.
The positive stand of European investors assumes significance as most Asian entities are still bearish on the Indian market. Hedge funds, however, are still looking for short ideas in India - they are searching among select commodity plays (steel, cement) and rate sensitive sectors, says the report.
