JP Morgan research head sees Sensex at 4800 by March

The current buoyancy in the market not withstanding, the bellwether Bombay Stock Exchange's 30-share Sensex could end the current financial year below the psychological 5000-mark, said Arup Raha, head of equity research, JP Morgan India.

Raha has a year-end target of 4800 for the index, but feels the structural growth story is still intact.

In an interview with Crisil MarketWire on Wednesday, Raha said that all indications are that the economic cycle is close to peaking out. He is expecting earnings downgrades of key companies by analysts after the July-September and October-December quarter.

JP Morgan's year-end Sensex forecast is lower than consensus estimates. There are still six months left in this financial year, but Raha is convinced that investors will make less money than they did last year.

The Sensex may not fare as bad in case interest rates do not rise as much as feared and if oil prices retreat sharply.

Raha is bullish on information technology, banking, power and engineering.He is bearish on autos, fast moving consumer goods, and metals.

In case of banking, Raha is more bullish on private sector banks, as he feels there is tremendous potential for growth considering that consumer loans as a percentage of the gross domestic product in India is the lowest among developing Asian markets.

The market has come to terms with coalition politics, Raha feels, but adds that market will be looking for consistency on the policy front rather than big-bang announcements.

Excerpts of the interview:

Peaking economic cycle: We believe that the structural growth story in India is a very good one, and it is intact. But all economies go through a cycle, and what we believe right now is that the Indian cycle is close to peaking out. The numbers that we are seeing in industrial production is pretty much close to peaking out.

A steady growth in industrial production above the trend growth line of the economy, strong growth in imports, setting in of inflationary pressures, and the tightening of monetary policy by the Reserve Bank of India are all indications of the cycle peaking out.

This downturn, according to us, has not been factored in by analysts.We think there is some room for caution ahead.

When I say that the structural growth story is intact, we think that the trend growth rate is still robust, but the cycle is turning down. If you just take the absolute numbers, it is a good growth, but there is a slowdown.

You can stay above the trend (line) for some time, but ultimately you have to head back towards the mean, otherwise you get too many structural imbalances in the economy.

Raha expects the gross domestic product to grow 6.0% in 2004-05 (April-March) compared with 8.2% in 2003-04.

Risks to Sensex target: We have a year target of 4800 for the Sensex.

The risk to our target could be the interest rate not rising as much as we expected it to. We have assumed a risk-free interest rate of 6.5% while calculating the target, which is the average rate that we expect it to be.

The other risk is that there is sufficient momentum in industrial production and we have been too early in calling a top.

There is a risk that we may not see capacity expansion to the extent that we have anticipated. The last risk is an event risk, like oil prices coming down sharply.

Downward revision in earnings: I think you will see a downward revision in earnings estimates, after the second or third quarter (of this financial year ending in March).

We are looking at a cyclical versus structurally driven story. So we would be looking to shift our portfolio towards the latter.

We are bullish on sectors like information technology, power and engineering. We have taken a much more cautious view towards auto than the market has. We are cautious on some of the consumer plays.

Cement is a slightly different story. On cyclical grounds it should slow down, but then there is also the structural story of increased spending on infrastructure projects, the boom in the housing market and things like that.

In case of the IT sector, we are bullish on the outsourcing story. The way the industry is evolving, it will eventually come down to a few large players.

Bullish on banking: We do like some of the private sector banks. We are negative on the public sector banks.

One of the main reasons (for a bearish view on PSU banks) is because of (concerns over a rise in) interest rates.

State-owned banks have a higher proportion of their cash in government securities, and an upward move in interest rates affects their treasury income.

That we believe is in the price. But what we think is not in the price is the pressure on margins.

But the sector as a whole looked attractive. If you look at the banking sector over a longer period, it has been so under-penetrated. Consumer loans in India is 5% of the gross domestic product. The next lowest among developing markets in Asia is Philippines, where consumer loans is 9% of the GDP.

So we are looking at a huge market in consumer loans and the mortgage market.I do not see the RBI draft guidelines, (which) restricts ownership in private banks, deterring foreign portfolio investors from looking at quality Indian banks.

FOREIGN FUNDS ON INDIA: Foreign investors in general have a very constructive view towards the Indian equity market.

It is a market which gives good returns, it is a market where there is good corporate governance, accounting standards and transparency.

Also, India still remains one of the best bets among developing markets in Asia, from a foreign institutional investor's perspective.

Mainly it is growth (that makes India more attractive).

Depending on the view of the global economy, if you think global growth momentum is slowing, or you think interest rates are rising, India is not exposed to these risks. It is defensive in a regional context.

The developments in China do affect India, but not directly and to an extent that it impacts some of the other north Asian countries which are big exporters to China.

But it affects India indirectly, like the impact on steel prices (if steel demand from China would slow down).

(According to analysts, China accounted for nearly one-fourth of the total global steel consumption in calendar 2003, and was a major contributor to the rise in steel prices.)

THE POLITICAL SITUATION: The market has come to terms with coalition politics. You may see some knee jerk reactions occasionally. But I am not particularly concerned.

If you see, since the reforms process started, we have seen several governments. There have been some issues here and there. But if you look at the broad thrust of the policy agenda, it has remained the same.

The market is not hoping for some major favourable policy announcement by the government.

Essentially not a whole lot. Just stay the course. I think the market really looks for policy consistency more than anything else. Market does not like uncertainty, it does not like flip-flopping. The rest it can digest.