Best yet to come for Sen­sex, Nifty: for­eign bro­ker­ages

Mint Asia ST - - News - BNY ASRIN S ULTANA & A MI S HAH

Even

as stock mar­kets con­tinue to scale life­time highs, top in­vest­ment banks have be­gun re­vis­ing up­wards their tar­gets for the bench­mark indices.

Not only are they bet­ting on an eco­nomic re­cov­ery and en­dors­ing the re­cent re­form ini­tia­tives un­der­taken by the Union gov­ern­ment, they are also sig­nalling that the best for the mar­kets is yet to come.

Gold­man Sachs Group Inc. and Cit­i­group Inc. have raised their tar­gets cit­ing the bank re­cap­i­tal­iza­tion pro­gramme, in­fra­struc­ture push and con­tin­ued in­flow of do­mes­tic sav­ings into eq­ui­ties. They be­lieve th­ese fac­tors more than off­set con­cerns on val­u­a­tion and poor earn­ings growth and are suf­fi­cient to pro­pel the Sen­sex and Nifty to newer highs in 2018.

In a 29 Oc­to­ber note, Cit­i­group said it ex­pects the Sen­sex to reach 33,800 in March 2018 from an ear­lier tar­get of 32,200; it also re­duced its fis­cal 2018 earn­ings per share (EPS) growth tar­get for Sen­sex firms to 13% from 17-18% at the start of the year.

“While earn­ings dis­ap­point­ments/down­grades con­tinue, the Street should be more op­ti­mistic on re­cov­ery post the big govern-

STREET SIGNS

Cit­i­group on Sen­sex 33,800 ment push” in the form of bank re­cap­i­tal­iza­tion, in­fra­struc­ture blue­print and in­creases in min­i­mum support prices, wrote Cit­i­group an­a­lysts.

Last week, the gov­ern­ment an­nounced that it would in­fuse Rs2.11 tril­lion into sta­te­owned banks over this year and the next through var­i­ous means. It also an­nounced Rs6.92 tril­lion in in­vest­ments in roads over the next five years and raised the min­i­mum support price for wheat. Th­ese mea­sures are ex­pected to boost bank credit growth, which Gold­man Sachs on Nifty is hov­er­ing at sin­gle-digit lev­els, and boost eco­nomic out­put. Mar­kets have been ris­ing since then and on Tues­day, both the Sen­sex and Nifty closed at new highs. The Sen­sex rose 0.33% to 33,266.16 points; the Nifty gained 0.39% to 10,363.65 points.

Gold­man Sachs has also in­creased its end2018 Nifty tar­get to 11,600 points, up from a Septem­ber 2018 tar­get of 10,900 points, and re­it­er­ated its ‘over­weight’ stance on In­dia, cit­ing the im­pact of bank re­cap­i­tal­iza­tion.

Gold­man an­a­lysts are more op­ti­mistic about a cor­po­rate earn­ings re­cov­ery, which they have fore­cast to hap­pen as early as the sec­ond half of the cur­rent fi­nan­cial year as the ad­verse im­pact of the tran­si­tion to the goods and ser­vices tax wanes.

“Re-rat­ing of GDP growth ex­pec­ta­tions and re­moval of ‘left-tail’ risk in the bank­ing sec­tor should support In­dia’s price-to-equity pre­mium rel­a­tive to the rest of the re­gion,” they wrote in a 26 Oc­to­ber note. Gold­man added that past re­cap­i­tal­iza­tion episodes sug­gest that mar­kets per­form strongly as credit growth picks up and macro re­cov­ery gathers pace.

High val­u­a­tions amid weak earn­ings growth have re­sulted in for­eign in­vestors sell­ing In­dian stocks for a cou­ple of months now. In Oc­to­ber, for­eign in­sti­tu­tional in­vestors (FIIS) sold In­dian eq­ui­ties worth Rs5,271.92 crore while lo­cal in­sur­ance and mu­tual fund com­pa­nies bought Rs9,354.31 crore worth of shares.

Ac­cord­ing to Cit­i­group, in the ab­sence of at­trac­tive al­ter­na­tives, do­mes­tic flows could be sus­tained and the gov­ern­ment’s re­form agenda and gross do­mes­tic prod­uct (GDP) growth re­cov­ery should also turn FII sen­ti­ment in­cre­men­tally pos­i­tive.

Cit­i­group an­a­lysts, how­ever, warned their earn­ings growth fore­cast for the cur­rent fis­cal might be slashed fur­ther. Bloomberg data shows Sen­sex firms’ con­sen­sus EPS fore­cast for the cur­rent fis­cal has been slashed by 10.69% since April and by 5.2% for the next year.

nas­rin.s@livemint.com

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