MUMBAI: The outlook on Indian benchmark equity indices has worsened in the past five months as soaring prices take the sheen off India's growth miracle, and the possibility of the European sovereign credit crisis ballooning into another Lehman moment makes investors seek safety. The
BSE Sensex could fall as much as 16% to
15,000 by the year-end, an ET poll of 13 fund managers and equity strategists shows.
This is six-and-a-quarter point lower than what a similar poll showed in February. "We are worried and fear a slowdown due to higher interest rates," said Satish Ramanathan, head of equities at Sundaram Mutual Fund. "We are pessimistic on the Sensex as we find the demand situation collapsing. We expect a 18-20% correction and see the index settling at 15,000 level because we see the earnings and pricing power coming down. If the correction happens, it will be (a good) time to accumulate quality stocks," Ramanathan added.
India is among the 10 worst-performing global markets along with Tunisia and Egypt, falling 11%. Global investors, who poured in $29 billion into Indian equities last year, have net invested just $52 million this year, lower than Pakistan's $72.8 million. In the ET poll of 13 fund managers and equity strategists, four said the Sensex could end between 18,200 and 20,000 by December.
Investors get risk-averse
In the ET poll, four others said the index could close in the range 17,000-18,000 and five said the gauge could dip to 16,000 or even 15,000 by the year-end. Most of them did not want to be identified. "If anything, there can be disappointment and India is a good case in point where numbers have been tepid," said Shankar Sharma of First Global.
"So in order to sustain the market at these levels you needed numbers which had to be substantially ahead, but that is being in a fool's paradise. That was not going to happen and it did not happen." The Sensex last week slipped below 18,000 to 17,870.53, as foreign investors pulled out funds after officials at the European Union failed to come out with a concrete proposal to rescue Greece, which is on the verge of default. The MSCI Emerging Markets Index fell 0.3% to 1,103.74, the lowest close since March 18. Funds investing in developing markets had withdrawals of about $829 million during the week ended June 15.
"Investors worldwide are more risk-averse because of the European crisis and this will result in the market trending lower over a period of time," said
Sashi Krishnan, CIO, Bajaj Allianz Life Insurance. Officials at the European Union are meeting on Sunday and Monday to work out a flawless bailout package for Greece to avoid a contagion that could destabilise the union as Spain, Ireland and Portugal too look vulnerable.
"We all lived through Lehman Brothers," German Chancellor Angela Merkel said. "I don't want another such threat to emanate from Europe. We wouldn't be able to control an insolvency." Also, the growth story that lured investors seems to be fading with the Reserve Bank of India raising interest rates for the tenth time in 15 months to contain prices that are rising fastest among big emerging markets. This is hurting corporate profitability and demand. The premium valuations that India enjoyed all along due to high returns on equity is giving way.
"India's valuation premium over other emerging markets is increasingly at risk,"
India Infoline analysts, including Nemkumar, wrote in a report. "A worsening competitive environment, falling productivity gains, large balance-sheet expansion and deterioration in cyclical outlook for some sectors have dragged India's ROE."
The Sensex is at 14.8 times future earnings, China's Shanghai Composite is at 12.7, Brazil's Bovespa is at 10 and Russia's RTS is at 6.7, according to Bloomberg data. "All the medicines administered to control inflation will result in a slowdown in the economy and earnings downgrades. This pain will have a rub-off effect on the stock market as well, at least till the end of the September quarter," said Anand Shah , chief investment officer, BNP Paribas Asset Management. Some believe the rate increases have been excessive and could cripple economic growth. Gross Domestic Product growth, which has been above 8%, fell to 7.8% in the fourth quarter of last year.
"It's like burning a forest to tame the tiger," said Aneesh Srivastava, CIO, IDBI Federal Life Insurance. "Most of the drivers of inflation are emanating from a spurt in prices of imports and agriprice and hence are beyond the RBI .s control, and these have started showing signs of reversal. RBI...should wait and watch more
domestic and global data before taking further actions," he said.
