Under our worst-case scenario, the Sensex could hit 9,500
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Hong Kong-based executive director and head of equity strategy at BNP Paribas Securities (Asia) LtdClive McDonnell came wearing shorts for the interview at the Taj Mahal hotel in Mumbai. Not for long. He quickly changed to formal wear when he had to pose for a photograph.
But going by his views on Indian equities, investors should be safer staying put with the shorts. He is predicting that the Sensex, the Bombay Stock Exchange’s bellwether index, will fall further—and stay around 9,500, down from its current 12,526.
In a September report, McDonnell said the market is most likely to suffer the most from a withdrawal of liquidity is India, and that the country has replaced China as the biggest “underweight” in the region. Edited excerpts:
How much further downside do you see in Indian markets?
Well, under our worst-case scenario, the Sensex could hit 9,500. We have assumed that earnings could be cut by 20% from here. Also, ... we see the interest rate policy being maintained, (as) our economists (also) say, until the first quarter of the next (calendar) year.
This (the 9,500 level) is our 12-month target. However, we expect these to be met before the end of the year (calendar 2008) as these problems grow.
But it’s not just India. We expect similar declines in other markets in the region, particularly in China, sooner rather than later, for calendar 2009.
We have assumed that markets trade at true bear market levels, which for India is 11.5 times (price-earnings multiple). Which represents close to one standard deviation below its long-term average. All the markets in the region apart from Korea and India are trading close to one standard deviation below, or more than one standard deviation below their long-term averages. I see no reason why Korea or India should be any different from that.
One of the major issues I have with India at the moment... the interest rate policy is inappropriate. Earliest April 2009 (is when) we will see interest rates cut.
There must be some surprises that can force an upside review?
If the RBI changes policy and cuts interest rates, and if we did see index moving towards our target, and if the global situation improves, then we will definitely review our outlook on India.
However, there are four very big ifs—valuations, interest rates, the liquidity story and the global back drop. All four of them are scoring negatively in India.
The earning or the valuations story could improve in India, but when the index (Sensex) meets our downside target (of 9,500). If you look in China at the moment, there is one factor positive – interest rates. In Singapore, there are two – interest rates and earnings. Based on data today, China could be upgraded before India.
Source : Live Mint
