India has been the worst-performing market this year, falling a third in US dollar terms. Peaking inflation and a consequent pause in RBI rates are the positives.
Global brokerage firm Bank of America Merrill Lynch (BoAML) has come out with its outlook for Indian markets in 2012. It expects the Sensex to correct in the first half of 2012, mainly on the back of a slowdown in the Indian economy. However, the Bombay Stock Exchange benchmark may rise to 19,000 levels by December 2012 if inflation cools and rate hikes are rolled back, BoAML's outlook says.
Top sectors and stocks:
Sector overweights: Pharma, autos and banks
We play a mix of defensives (through pharma rather than staples) and consumer-related rate sensitives through autos and private sector banks.
Top Buys: Sun Pharma, Lupin, Maruti, HDFC Bank, ICICI Bank
Top Underperforms: Bajaj Auto, Tata Steel, Ambuja Cement
Top Mid Cap Buys: Apollo Tyres, Havells, Exide, Dish TV, Manappuram
Here's a summary of BoAML’s outlook for 2012:
India has been the worst-performing market this year, falling a third in US dollar terms. Peaking inflation and a consequent pause in RBI rates are a positive which will likely help the traditional December rally.
However, we continue to expect a tough market over the next six months and expect a correction of the Sensex to 14,500 as growth concerns take center-stage:
1. Gross domestic product (GDP) growth to slow; downgrades likely: We expect FY13 GDP to slow to 6.8 per cent and consensus to cut GDP forecasts over the next few months. GDP growth in the next few quarters is likely to come even lower at around 6.5 per cent. A slower GDP will be led by: (a) a slowing global economy, (b) impact of high rates and (c) slowing investment spend.
2. Earnings downgrades to continue: We continue to expect earnings downgrades, led by slowing sales and sustained margin pressure from rising labour and interest costs. We expect the bottom-up Sensex EPS (earnings per share) of Rs 1,275 to be downgraded to Rs 1,200 (growth of under 10 per cent against expectations of nearly 15 per cent).
3. Valuations will see slight de-rating: Based on analysts’ forecasts, markets at 13 times one-year forward PE (price/earnings) are at a slight discount to long-term averages. Slowdown in GDP and earnings growth as well as falling RoEs (return on equities) will likely lead markets to trade lower. Secondly, on a relative basis, India trades at a 27 per cent PE premium to global emerging markets (GEM), higher than a 10-year average of 17 per cent.
Markets stop panicking when policymakers start panicking; year-end index 19,000
The good news is that we could get some positive returns in 2012 if policymakers take steps to reverse the economic slowdown. like a) aggressive rate cuts by RBI: we expect rate cuts from April 2012 (though slow given stick inflation); markets typically rally 3-6 months after the rate-cut cycle starts, and (b) policy reform by the Government.
Top sectors and stocks:
Sector overweights: Pharma, autos and banks
We play a mix of defensives (through pharma rather than staples) and consumer-related rate sensitives through autos and private sector banks.
Top Buys: Sun Pharma, Lupin, Maruti, HDFC Bank, ICICI Bank
Top Underperforms: Bajaj Auto, Tata Steel, Ambuja Cement
Top Mid Cap Buys: Apollo Tyres, Havells, Exide, Dish TV, Manappuram
Here's a summary of BoAML’s outlook for 2012:
India has been the worst-performing market this year, falling a third in US dollar terms. Peaking inflation and a consequent pause in RBI rates are a positive which will likely help the traditional December rally.
However, we continue to expect a tough market over the next six months and expect a correction of the Sensex to 14,500 as growth concerns take center-stage:
1. Gross domestic product (GDP) growth to slow; downgrades likely: We expect FY13 GDP to slow to 6.8 per cent and consensus to cut GDP forecasts over the next few months. GDP growth in the next few quarters is likely to come even lower at around 6.5 per cent. A slower GDP will be led by: (a) a slowing global economy, (b) impact of high rates and (c) slowing investment spend.
2. Earnings downgrades to continue: We continue to expect earnings downgrades, led by slowing sales and sustained margin pressure from rising labour and interest costs. We expect the bottom-up Sensex EPS (earnings per share) of Rs 1,275 to be downgraded to Rs 1,200 (growth of under 10 per cent against expectations of nearly 15 per cent).
3. Valuations will see slight de-rating: Based on analysts’ forecasts, markets at 13 times one-year forward PE (price/earnings) are at a slight discount to long-term averages. Slowdown in GDP and earnings growth as well as falling RoEs (return on equities) will likely lead markets to trade lower. Secondly, on a relative basis, India trades at a 27 per cent PE premium to global emerging markets (GEM), higher than a 10-year average of 17 per cent.
Markets stop panicking when policymakers start panicking; year-end index 19,000
The good news is that we could get some positive returns in 2012 if policymakers take steps to reverse the economic slowdown. like a) aggressive rate cuts by RBI: we expect rate cuts from April 2012 (though slow given stick inflation); markets typically rally 3-6 months after the rate-cut cycle starts, and (b) policy reform by the Government.
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