Recent market rally may have resulted in upward outlook revision by brokerages, but HSBC feels Indian equities are overpriced and Sensex is in for a correction, which may slump to 26,000 by the end of 2016.
"We expect the Sensex to correct to 26,000 by 2016-end. This expectation is largely due to high valuations and expectations of risk aversion due to uncertainty related to some of the global events like European politics and the US Fed's move," HSBC Equity Strategist for Asia-Pacific Devendra Joshi told PTI here.
He added that on the domestic front, any poor distribution of the monsoon, estimated to be above normal this year, can be a deal-breaker.
Citing his conversations with foreign investors, the Hong Kong-based Joshi said there are also concerns surrounding the valuations in the country at present.
"We feel that the current valuations make India expensive and they will have to come down to increase investor interest," he said, adding that Indian equities are trading at over 17 times one-year forward earnings as against an earnings growth of around 14 times.
For investor interest to grow, the gap between the two numbers has to narrow, he emphasised.
The BSE's 30-share Sensex hit a 7-month high last week, prompting brokerage Ambit Capital to raise its year-end target to 29,500 by the end of the fiscal.
Morgan Stanley has a 'bull case target' of 30,000 by March 2017.
The Sensex closed at 26,635 on Friday, after a low of 22,494 on February 29.
On its contrary call, Joshi said HSBC had cut India to 'underweight' in May 2015 due to high expectations when everybody was gung-ho about the country. It revised up the outlook to 'neutral' last month.
Joshi acknowledged that there are positive factors at play, including a growth and reform-oriented dispensation and margin improvement.
He singled out inflation as a factor to watch out for, adding that any movement in the reading, which surprised on the upside in April, may lead to action by RBI with a bearing on investor confidence.
On the continuation of Governor Raghuram Rajan as the head of RBI, he said "the incumbent does command respect" but its calls on the country will not be affected much by turn of events on this front.
"He (Rajan) definitely adds to the investor confidence and would like to see him continue for the second term. But as for our call on India, it mainly depends on fundamental factors, including economic growth, earnings, valuations and investor holdings," Joshi said.
Rajan's current term is set to end in September and speculations are rife about his continuation in the post.
