Re­turns may be Muted in Near Term, Says BofAML

It is over­weight on fi­nan­cials, sta­ples & ce­ment; and un­der­weight IT, consumer dis­cre­tionary

The Economic Times - - Smart -

Mum­bai: Ther­al­ly­in­glob­al­mar­kets that has driven In­dian mar­kets higher this year may re­verse in the near term, lead­ing to muted re­turns from here on, said Bank of Amer­ica Mer rill Lynch, re­tain­ing its De­cem­ber-endSen­sex­targetof 29000.

The 30-stock in­dex hit the 29000mark for the first time since Septem­ber on Thurs­day be­fore end­ing be­low the level at 28892.97, up 28.26 points or 0.1%.

“Global equities are en­ter­ing a ‘eu­phoric’ zone and may take a breather,” BofAML said in a note to clients.

The in­vest­ment bank said it is over­weight on fi­nan­cials, sta­ples and ce­ment companies. It is un­der­weight in­for­ma­tion technology and consumer dis­cre­tionary stocks.

It ex­pects busi­ness cy­cle in In­dia to im­prove in the next two to three years, but the resid­ual im­pact of de­mon­eti­sa­tion, rich val­u­a­tions, and risks of fur­ther earn­ings down­grades along with likely re­ver­sal in global mar­ket trend will keep re­turns capped. Sen­ti­ment in emerg­ing mar­kets (EMs) has im­proved due to a weaker dol­lar and cheaper val­u­a­tions com­pared to the US mar­kets. Along with EMs, In­dian mar­kets have been on a strong wicket in the last few weeks, driven by strong in­flows from do- mes­tic in­vestors and as third quar­ter earn­ings beat the low­ered ex­pec­ta­tions af­ter de­mon­eti­sa­tion. How­ever, BofAML said that the mar­ket is un­der-ap­pre­ci­at­ing the im­pact of de­mon­eti­sa­tion. “When companies speak of ‘ nor­mal­i­sa­tion’, they mostly re­fer to restora­tion of vol­umes. Equities are, how­ever, pric­ing in a restora­tion of growth,” the bank said in a re­port.

More­over, the Sen­sex is trad­ing at a 12-month for­ward price-to-earn­ings ra­tio of 17 times, which is 13% above long-term av­er­ages and mar­kets have his­tor­i­cally strug­gled to de­liver pos­i­tive re­turns at such mul­ti­ples, the bank said.

“Cou­pled with con­tin­u­ing risks of con­sen­sus down­grades, we be­lieve mar­kets could ei­ther fall in near term or time cor­rect,” the bank said. The roll out of the Goods and Ser­vices Tax in Q2FY18 could bring fur­ther un­cer­tainty and put pres­sure on the mar­ket.

BofAML ex­pects ag­gre­gate Sen­sex earn­ings to grow at 12% in FY18 and 14% in FY19. While the bank ex­pects Sen­sex re­turns to be muted, it has fore­casted bet­ter prospects for pri­mary mar­ket is­suances this year.

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