With the macro-economic scenario still posing challenges for Indian shares, caution seems to be the buzzword on Dalal Street.
Factors such as high inflation, rising interest rates, slowdown in corporate earnings and dwindling inflows from foreign and local investors have weighed on domestic equities this year. No wonder some of the leading foreign broking firms are advising clients to reduce risk and preserve cash.
At Monday’s close of 18,420.11, the Bombay Stock Exchange (BSE) benchmark Sensex has lost over 10 per cent in 2011, making India the worst-performing stock market in the world this year. The scenario is unlikely to change in the near term, say experts.
| NO RESPITE | |||
| Index | Country | 6-Jun-11 | % chg (YTD) |
| Dow Jones* | America | 12151.26 | 4.96 |
| Kospi | Korea | 2113.47 | 3.05 |
| DAX# | Germany | 7099.49 | 2.68 |
| CAC 40 # | Canada | 3864.43 | 1.57 |
| Hang Seng | Hong kong | 22949.56 | -0.37 |
| FTSE 100 # | UK | 5854.35 | -0.77 |
| Shanghai Se Comp | China | 2728.02 | -2.85 |
| Micex # | Russia | 1625.48 | -3.70 |
| Brazil Bovespa* | Brazil | 64340.50 | -7.16 |
| Nikkei 225 | Japan | 9380.35 | -8.30 |
| Sensex | India | 18420.11 | -10.19 |
| *As on June 3, 2011 #As on 1630 IST Compiled by BS Research Bureau Source: Bloomberg | |||
“While the market looks fairly priced at the moment, the uncertain macro environment, due to high inflation and interest rates, indicates that risks are to the downside,” Macquarie’s India strategists Rakesh Arora and Arjun Bhattacharya said in a note to clients. “While the market may continue to remain in a narrow band over the next few months, investors should consider focusing on accumulating good quality names that have strong balance sheets and visibility in earnings,” they added.
Macquarie’s strategists are of the view that the Indian stock market needs to consolidate at the current levels before it can move up, but did not rule out another 7-8 per cent dip. They have also made several changes to their top 10 stocks and model portfolio for India to reduce risks and increase weight into stocks with higher earnings certainty.
Another foreign brokerage Bank of America (BofA) Merrill Lynch is advising its clients that “capital preservation” should be a top priority in immediate term.
“As the macro headwinds grow stronger by the day, earnings pressure continue to build up, global uncertainty refuse to wane, and flows dwindle — things are not looking great in June too. The standard strategies like ‘buy and hold’ or ‘sell and go’, in our view, may not work in the current environment,” said Vijay Gaba, equity strategist at BofA Merrill Lynch in a note to clients. “In this environment we suggest a moderate asset allocation and equities portfolio oriented towards large cap, and low-beta stocks, with a greater focus on capital preservation,” he added.
Gaba sees macro worries abating sometime in the second half of FY12. “Given the underperformance of India, global investor underweight and bearish consensus, the rally could be sharp and surprising. In our view, investors should slowly start positioning for market bottoming out over next 6 months,” he said.
There are others who believe the market has already discounted most of the negatives and valuations are now looking attractive. “Lot of bad news have been factored in the price,” said Nilesh Shah, president - corporate banking, Axis Bank. “From a value perspective, you are entering in a buy zone,” he added.
At Monday’s close, the Sensex was trading at 14.84 times its estimated earnings for FY12, according to Bloomberg data. This means the 30-stock index is available at close to its long-term average price-to-earnings ratio.
