Citing deteriorating macro economics, foreign brokerage Bank of America Merrill Lynch (BofAML) today said it remains cautious on the domestic market and pegged down the Sensex target to 32,000 by December.
After bad days for the stock market since the budget, the market rallied almost 5 per cent in April and closed at 35,176 today.
"Although the country's microeconomics are improving, the macroeconomics are deteriorating. We think that macro will dominate in the near term and see downside risks to Indian equities. The higher oil prices will hurt the deficits and political uncertainty will increase into elections," the BofAML global research report said.
"As earnings are weak, we stay cautious on the market and our December Sensex target is 32,000 points," it added.
India has underperformed emerging markets 4 per cent year-to-date as macro concerns accumulate.
The brokerage expects a revival in earnings growth to help the market deliver returns despite elevated multiples, which it believes is unlikely.
Bottom up economic trends seem to be improving according to BofAML as cement demand, electricity consumption, retail lending, rural consumption is getting better.
"Power demand has steadily risen. FMCG companies too have reported strong volume growth in daily consumer products. On the back of robust demand, retail loan growth is at multi-year high," it said.
However, the corporate earnings have been chronically weak, according to the report, with the market witnessing continuous downgrades.
BofAML expects the financials to likely to remain the largest drivers of aggregate earnings in India.
"The public sector banks are likely to remain pressured by high provisions and rising non-performing assets for the next few quarters," it said.
According to the brokerage, the recent circular by the Reserve Bank of India (RBI) which made the new Insolvency and Bankruptcy Code the sole process for resolving corporate default, will likely add some more non-performing assets (NPAs) to bank balance sheets in the near term.
At some point though, the report expects this to hit a peak and aggregate banks/ financials earnings to deliver strong growth off a weak base.
"The precise timing of this inflection, however, is difficult to predict - whether financials will lead the recovery in FY19 earnings as currently forecasted is still uncertain," it said.
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