Returns may be Muted in Near Term, Says BofAML
It is overweight on financials, staples & cement; and underweight IT, consumer discretionary
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.