Sensex at 29K by December 2017? Why this stock rally has to halt, or time-correct
NEW DELHI: The domestic equity market has rallied nearly 9 per cent so far in 2017 and about 13 per cent from the lows hit during the demonetisation drive, but the rally may not last long, as most of the positives are already in the prices and valuations are no longer cheap, global brokerage BofA-ML said in a report on Thursday.
The year-to-date (YTD) rally in Indian stocks has been largely in line with the returns delivered by other global indices, such as MSCI Emerging Market Index, which has risen 9.7 per cent, while MSCI World Index has gained 5.7 per cent during this period.
BofA-ML’s global emerging market (GEM) strategists Ajay Kapur and Ritesh Samadhiya highlighted that global equities are entering an ‘euphoric’ zone from the near-panic levels hit in late 2016, and they may take a breather in the near term.
The global investment bank expects the longer-term business cycle in India to improve over the next 2-3 years, but says near-term returns would be capped from here on, due to (a) possible reversal of the global wave (b) under-appreciation of the residual impact of demonetisation by the market, (c) rich valuations and (d) continued risks of earnings downgrades.
While the momentum is strong for the equity market, BofA-ML’s December 2017 Sensex target for 29,000 leaves little room for upside from current level.
At an earnings multiple of around 17 times, the Sensex has always struggled to give positive returns over the next 12 months.
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The recent rally has again taken the market into the expensive territory, from comparatively cheaper valuation compared with most emerging market peers. The 12-month forward PE of Sensex at 17 times is 13 per cent above its long-term averages.
At these multiples, the market has historically struggled to deliver positive return over the subsequent 12 months, said the BofA-ML note. While India’s premium to the MSCI emerging market index has fallen, it is still large at 38 per cent, which is above the long-term average.
Coupled with continuing risks of consensus downgrades, BofA-ML expects 5-7 per cent downgrade for the aggregate FY18 EPS for Sensex. It believes the market could either fall in the near term or time-correct.
The rollout of GST in Q2 of FY18 could further bring in earnings uncertainty, adding pressure on the market, the BofA-ML note said.
Primary market issuances have been tepid in 2016 at around $8 billion compared with $19 billion and $12 billion in 2015 and 2014, respectively. BofA-ML expects primary issuances to increase substantially in 2017, which could cap market returns.
The global investment bank stays underweight on the discretionary space, because it feels the impact of demonetisation could last longer than expected. “When companies talk of ‘normalisation’, they mostly refer to a restoration of volumes. Equities are, however, pricing in a restoration of growth,” it said.
The brokerage expects aggregate Sensex earnings to grow 12 per cent and 14 per cent in FY18 and FY19 respectively. It is overweight on financials, staples, cement and underweight on IT apart from discretionary.
The year-to-date (YTD) rally in Indian stocks has been largely in line with the returns delivered by other global indices, such as MSCI Emerging Market Index, which has risen 9.7 per cent, while MSCI World Index has gained 5.7 per cent during this period.
BofA-ML’s global emerging market (GEM) strategists Ajay Kapur and Ritesh Samadhiya highlighted that global equities are entering an ‘euphoric’ zone from the near-panic levels hit in late 2016, and they may take a breather in the near term.
The global investment bank expects the longer-term business cycle in India to improve over the next 2-3 years, but says near-term returns would be capped from here on, due to (a) possible reversal of the global wave (b) under-appreciation of the residual impact of demonetisation by the market, (c) rich valuations and (d) continued risks of earnings downgrades.
While the momentum is strong for the equity market, BofA-ML’s December 2017 Sensex target for 29,000 leaves little room for upside from current level.
At an earnings multiple of around 17 times, the Sensex has always struggled to give positive returns over the next 12 months.
Image 1
The recent rally has again taken the market into the expensive territory, from comparatively cheaper valuation compared with most emerging market peers. The 12-month forward PE of Sensex at 17 times is 13 per cent above its long-term averages.
At these multiples, the market has historically struggled to deliver positive return over the subsequent 12 months, said the BofA-ML note. While India’s premium to the MSCI emerging market index has fallen, it is still large at 38 per cent, which is above the long-term average.
Coupled with continuing risks of consensus downgrades, BofA-ML expects 5-7 per cent downgrade for the aggregate FY18 EPS for Sensex. It believes the market could either fall in the near term or time-correct.
The rollout of GST in Q2 of FY18 could further bring in earnings uncertainty, adding pressure on the market, the BofA-ML note said.
Primary market issuances have been tepid in 2016 at around $8 billion compared with $19 billion and $12 billion in 2015 and 2014, respectively. BofA-ML expects primary issuances to increase substantially in 2017, which could cap market returns.
The global investment bank stays underweight on the discretionary space, because it feels the impact of demonetisation could last longer than expected. “When companies talk of ‘normalisation’, they mostly refer to a restoration of volumes. Equities are, however, pricing in a restoration of growth,” it said.
The brokerage expects aggregate Sensex earnings to grow 12 per cent and 14 per cent in FY18 and FY19 respectively. It is overweight on financials, staples, cement and underweight on IT apart from discretionary.
