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American brokerage Bank of America-Merrill Lynch (BofA-ML) today retained its Sensex target at 33,000 by December, but said in the medium term, the Dalal Street will see more volatility.
"We continue to maintain our December Sensex target of 33,000 points. But near-term the markets will remain subdued and range bound with a negative bias, as quarterly earnings are low and more earnings downgrades are likely over the medium term," BofA-ML Analyst Jyotivardhan Jaipuria said in note.
"Also, the India versus GEM premium is near all-time at 35% the GE averages," Jaipuria said.
The markets are likely to witness another quarter of weak growth in the ongoing earnings season. Mirroring the previous quarter when aggregate Sensex profit fell 1% year-on, profit growth is once again going to be subdued at 1%, he said, adding he sees more earnings downgrades for the next few months before stabilising and earnings upgrades may not start until next year.
On a top-down basis, we expect 2015-16 consensus growth estimates of 18% to get downgraded to 12-13% growth, he added.
However, he noted that FIIs have the all-time high overweight on the domestic market. This is on the back of nine consecutive quarters of positive FII inflows. Strong FII inflows have resulted in all-time high foreign ownership for the markets at about 28%.
While GEM funds have a 12.8% weight on the country against the index weight of 7.7%, which is a massive 510 bps OW.
Noting that the Sensex has rich valuations, he said post-2014 polls, the markets re-rated and have been trading at 16 times one-year forward PE. And despite the recent bloodbath, the valuations are still a 10% premium to long term averages. Also, in the GEM context it is currently at a 35% premium to GEM, he said.
