Though Indian markets have delivered the worst returns amid global peers since the beginning of the year, they haven’t bottomed yet, according to market experts. While valuations may appear attractive, the domestic macro headwinds continue and concerns on the global front haven’t eased enough to provide any hope for investors. The worst-case scenario: Drop of another 10 per cent.
There has been net outflow of $358 million from foreign institutional investors (FIIs), the key drivers of Indian markets since the start of 2011. In 2010, the net inflows were $29.3 billion of investments in 2010. While fund flows for most other emerging markets, with the exception of Russia and Korea, has remained subdued this year, FIIs continue to be cautious on Indian markets. This suggests fund flows will remain subdued in the near term at least.
Says Cameron Brandt, Director of Research of EPFR Global, which tracks global fund flows, “(Foreign) investors are cautious. They see an expensive market, where earnings forecasts for top-tier stocks are coming under pressure, a government that has frittered away a decent mandate for reform, prices that are growing at an uncomfortably brisk rate and rising geopolitical risk from an increasingly unstable Pakistan.”
In the light of global events and domestic macro headwinds, experts believe there is some more pain left before markets could bottom out.
| INDIA UNDERPERFORMS | ||||
| 21-Jun-11 |
Returns (%) | |||
| YTD | FTD | MTD | ||
| Asia/Pacific | ||||
| Hang Seng | 21,850.59 | -5.14 | -7.13 | -7.74 |
| Nifty | 5,275.85 | -14 | -9.56 | -5.11 |
| Sensex | 17,560.30 | -14.38 | -9.69 | -5.1 |
| Kospi | 2,048.17 | -0.14 | -2.78 | -4.4 |
| Taiwan Taiex | 8,597.62 | -4.18 | -0.99 | -4.35 |
| Shanghai Se Composite | 2,646.48 | -5.75 | -9.62 | -3.54 |
| FTSE Straits Times | 3,053.51 | -4.28 | -1.69 | -3.37 |
| Nikkei 225 | 9,459.66 | -7.52 | -3.03 | -2.41 |
| Jakarta Composite | 3,794.94 | 2.47 | 3.16 | -1.1 |
| Americas | ||||
| Nasdaq Composite | 2,629.66* | -0.87 | -5.44 | -7.25 |
| S&P/Tsx Composite | 12,857.70* | -4.36 | -8.91 | -6.85 |
| S&P 500 | 1,278.36* | 1.65 | -3.58 | -4.97 |
| Dow Jones Indus. Avg | 12,080.38* | 4.34 | -1.94 | -3.89 |
| Europe/Africa/Middle East | ||||
| FTSE 100 | 5,736.68# | -2.77 | -2.89 | -4.21 |
| CAC 40 | 3,841.07# | 0.93 | -3.68 | -4.11 |
| DAX | 7,205.03# | 4.18 | 2.33 | -1.21 |
| * As on June 20, # Till 1700 hrs IST Note: YTD= Year to date, FTD= Fiscal to date and MTD= Month to date returns Source: Bloomberg Compiled by BS Research Bureau | ||||
Says Saurabh Mukherjea, head of equities, institutional equities, Ambit Capital, “We have been saying for quite some time now that by the end of June, our Sensex target is about 16,000 and the logic is that our market is trading at highest valuations and having the highest inflation amongst the emerging markets.”
Mukherjea says the market is still factoring in 1,200 plus earnings for the Sensex. “We think there are still very meaningful downgrades in the pipeline. We expect another 5 per cent downgrades in the earnings.” This along with a 7-8 per cent de-rating in the PE multiple (for Indian markets) will take the overall market correction to about 10 per cent.
Others though believe that most of the bad news is largely factored in by the markets, which limits the downside. Devesh Kumar, Head of Equities – India, RBS Global Banking & Markets, RBS Equities (India) Limited says “On RBS estimates, MSCI India/Nifty has de-rated by around 20 per cent from the beginning of the year as the 12-month forward P/E has contracted to 13.8 times from 17.4 times at the end of 2010.
Consensus earnings estimates have declined 5 per cent since the start of the year and are now in line with our estimates. As such, we think the market’s ~20 per cent valuation de-rating has priced in quite a few concerns.”
While there is no debate on the downside for markets in the near-term, the gains are larger from a medium to longer-term perspective. That’s because, majority of the concerns seem to be factored in by markets.
Kumar says that the downside from current levels should be limited to around 5,000-5,100 on the NIFTY. He adds, “If markets trade at their historical average valuations of 14-14.5 times by the end of the year - the NIFTY would end the year at 5,800-6,000 levels. Risk-reward on an absolute basis does seem quite attractive here, with a potential upside of 11-16 per cent versus a downside of 3-5 per cent.” Gul Teckchandani, investment expert, too believes that most of the concerns are factored in. “Currently, the market is facing the headwind of inflation and interest rate. I think we are at the end of all that. This is good time to make investments in the market with about 1-2 per cent downside say about 100 points on the Nifty, unless something happens globally.”
He adds, “I think the Nifty should trade around 6,000 levels anytime between December 2011 and March next year.” Meanwhile, the Indian economy may have to go through some more pains given that interest rates haven’t peaked yet. Post RBI’s 25 basis points increase in repo rate (the rate at which the central bank lends to banks) this month, economists expect another 25-75 basis points increase in rates over the next 6-9 months. Going ahead, the news that India will see a near normal monsoon (slightly below normal) provides some relief. However, uncertainties on the global front continue as Greece’ debt crisis is far from over. More importantly, with the QE2 coming to an end in the current month, markets globally could feel the pressure of tight liquidity, which could impact fund flows in the interim. This could also lead to lower commodity prices. Among the key things to watch out for, Mukherjea says, “Beyond June, one will see the likely positive impact of reforms and monsoon. And if Q3 is not launched, the commodity prices will come off. Also, by that time if the commodity prices come down the RBI might take a pause from raising interest rates which will be good thing.” While government inactivity in terms of policy reforms is already known and factored in by the markets, there could be some positive surprises on this front if for instance, FDI in multi-brand retailing (even in a limited manner) is cleared.
With contributions from Jitendra kumar Gupta, Mehul Shah & Ashish Rukhaiyar
