There has been a gradual change in the market sentiment since the past few days. The euphoria seen post the announcement of the third round of quantitative easing (QE3) and the European Central Bank’s unlimited bond-buying programme has now given way to a cautious undertone.
Sample this. Post the announcement of QE3 by the US Federal Reserve on 13 September coupled with the “reform push” by the government at the domestic level, the BSE benchmark - Sensex rose 5.75% higher to 19,058 levels on 4 October. In this period, the Indian markets outperformed the global markets.
Hang Seng (up up 4.3%), All Ordinaries (2.6%), Seoul Composite (2.15%) and KLSE Composite (up 2.03%) were among the other notable gainers.
"Apart from the liquidity injection globally, the reversal in sentiment during September was also triggered by bold reform actions of the Indian government, which allayed fears of rating downgrade in the near term," said Amar Ambani, Head of Research, IIFL.
Come November, the focus shifted back to the looming "fiscal cliff" debate and Europe's economic troubles post the US presidential election outcome on 06 November 2012.
The Dow Jones Industrial Average (DJIA) has slipped nearly 3.5% since then, while Nasdaq, S&P 500 and NYSE have shed between 2.7–3.2% each. The BSE Sensex has also lost 2.6% in this period.
However, the fall is much steep if one considers the period starting from just after the announcement of QE3 in September 2012 till date. Among the global indices, Nasdaq Composite (down 9.4%), Taiwan Weighted (down 7.2%), Seoul Composite (down 6.6%) and BSE Sensex (down 4%) are some of the prominent losers. On the other hand, Hang Seng, Nikkei, Karachi 100 and ISE National 100 (Turkey) managed to stay afloat with gains ranging between 1.2–5.8%.
“For India, the newly found positive mood weakened through November with RBI not giving into popular demand of rate cut, weak IIP and external trade data, failure of 2G spectrum auction and global apprehensions around US fiscal cliff and Europe’s sovereign debt crisis. Also the markets sorely missed incremental reform announcements by the government,” Ambani of IIFL says.
Adds Rahul Arora, CEO-Institutional Equities, Nirmal Bang, “The investors have turned cautious as the pace of announced reforms in India have cooled, global liquidity injection euphoria has faded and valuations at 14x at the highest point of this rally were too expensive in India in the light of slowing global and domestic growth. Tempering of expectations of any immediate rate cuts by the RBI have moderated return expectations.”
Near-term outlook
So, what’s next? At the global level, there seems to be very little hope of the euphoria returning with fervour. France has already been downgraded and there are serious questions emerging on Germany and China’s growth going forward. The resolution of the US fiscal cliff could be a big short term positive, but sustaining any euphoria around that would be a key factor, analysts say.
“At the domestic level, the government pushing reforms aggressively and the Reserve Bank of India (RBI) cutting interest rate would be main trigger for market to move higher,” points out A K Prabhakar, Senior Vice President - Equity Research, Anand Rathi.
“We will continue to see bouts of risk-on and risk-off trades taking place for the next two–three years. One should be mentally prepared for this. But the direction of Indian markets firmly remains bullish,” notes Manish Sonthalia, Vice-President and Fund Manager, Motilal Oswal AMC.
Consensus analyst estimates peg the three–month Nifty target in the best case scenario at 5,900–6,000. On the flip side, any negative developments can take the it back to 5,000–5,250 levels, analysts say.
Stock picks
So, where should you invest? Are the current levels a good entry point for investors?
Says Arora of Nirmal Bang, “A correction of 5–7% on the Nifty would provide a good entry point.”
Besides the large-cap universe, analysts recommend investing in the mid caps on a selective basis.
“Valuations are cheap and given that we should ultimately see a reversal of the interest rate cycle next year, mid-cap valuations will be supported by reducing interest rates. However, it would still be prudent to avoid highly leveraged mid cap companies or those that have significant FCCB payouts pending,” points out Sandip Sabharwal, CEO – PMS, Prabhudas Lilladher.
“We are positive on aviation as well as the media and entertainment sectors where we see secular moves due to the change in the structural nature of the business,” Sabharwal adds.
| Brokerage Calls | ||
| Auto/Auto Ancillary | Buy | M&M, Maruti Suzuki, Motherson Sumi, Swaraj Engines |
| Aviation | Positive on | Jet Airways, SpiceJet |
| Banking | Buy | ING Vysya Bank, Karur Vysya Bank |
| Sell | ICICI Bank, SBI, PNB, Bank of Baroda, Canara Bank, Bank of India, Axis Bank | |
| Capital Goods | Buy | Havells India, Kalpataru Power |
| Sell | BHEL | |
| Cement | Buy | Madras Cement, JK Lakshmi Cement, JK Cement |
| Consumer Durables | Buy | Bajaj Electricals |
| Fertilisers | Buy | Rallis India, Coromandel Fertilisers |
| FMCG | Buy | Bajaj Corp, Tata Global Beverages, GCPL |
| Sell | HUL | |
| Healthcare/Pharma | Buy | Lupin, Cipla, Divi'S Labs, Cadila, Ipca Labs, Aurobindo Pharma |
| IT | Buy | Infosys, Tech Mahindra |
| Sell | TCS, Hexaware | |
| Media & Entertainment | Buy | Dish TV, Hathway Cable |
| Metal | Buy | Sterlite Industries, NMDC, GMDC |
| Sell | Tata Steel | |
| Oil & Gas | Buy | Cairn India, Petronet LNG, GSPL |
| Sell | GAIL (India) | |
| Power | Buy | NTPC, Power Grid |
| Sell | CESC | |
| Realty | Buy | Oberoi Realty, NBCC |
| Sell | Godrej Properties, DLF, HDIL | |
| Sugar | Buy | EID Parry |
| Telecom | Buy | Idea Cellular, Bharti Airtel |
| SOURCE: Consensus calls from local brokerages | ||
