Brokerages Advise Caution as Indices Continue to Rally
Year-end targets for the Sensex, set by brokerages, are already breached or only a few percentage points away
Mumbai: In just two months of 2017, the Sensex has already breached or is only a few percentage points away from the targets that top brokerage houses had set for the year-end. Domestic inflows has driven an unprecedented rally in the stock market after demonetisation, taking the benchmark indices within the sniffing distance of life-time highs, making it one of the most expensive emerging markets. The Sensex, which closed at 28,892.97 on Thursday, is 0.4% away from 29,000 — the targets set by Bank of America Merrill Lynch and Deutsche Bank for December. The Sensex had briefly surpassed 29,000 on Thursday, breaching the level for the first time since September. The index is 3.8% away from C i t i g r o u p G l o b a l Marke t s ’ September-end target of 30,000, while HSBC’s December-end target of 30,500 — the most optimistic of the lot — implies an upside of 5.6%.
UBS, whose December-end Nifty target is 8,800, implies a 1.6% downside from the current level. On Thursday, the Nifty closed at 8,939.5. The market rebound came on the back of recovery in emerging markets amid a softening dollar and perception that ear nings have seen only a limited impact of demonetisation.
Some of the brokerage officials, whom ET spoke to, did not commit whether they plan to raise their price targets. But, they agreed that the benchmark indices are trading around their fair values.
“It does not make sense to enter at current levels as valuations are high in the context of growth,” said Gautam Chhaochharia, head of research at UBS.
The Nifty is trading at a price-toearnings ratio of 22 times on a 12-month trailing basis, higher than the five-year average P/E of 18.7 times. This makes India among the Feb 23, 2017
most valued markets worldwide.
High valuation is partly a reason why foreign inflows have been tepid and lower than other emerging markets. Many have pulled money out of emerging markets, including India, since November on worries the US Federal Reserve will be more aggressive in increasing rates than before with Donald Trump preparing a fiscal stimulus. The US Fed’s next rate setting meeting is on March 14-15.
“FII flows are tepid probably because there is more money to be made elsewhere. India is not particularly cheap and earnings are not looking particularly robust either,” said Sanjay Mookim, India equity strate gist at Bank of America Merrill Lynch.
Mookim said market participants have underestimated the impact of demonetisation and he is cautious on themarketintheshorttermasexpectations have overshot reality.