Five immediate concerns that can take the wind out of Sensex's sails
NEW DELHI: Indian stocks might have remained resilient in the wake of global turmoil, but analysts believe that there are at least five immediate concerns that have the potential to take the wind out of the sails of market barometers.
Markets are likely to face headwinds in the form of sub-par monsoon rains, parliamentary disruptions, muted June quarter earnings, US Fed rate hike and debt crisis in Greece. However, analysts expect indices to hit fresh record highs in the next 12 months.
In the interim, they are likely to trade in a range.
"We have always been a structural bull for the Indian market. I do feel that the risk-on sentiment is gradually creeping back to the markets after a very difficult several months on the back of Greece and Chinese market volatility," says Tai Hui, Chief Market Strategist - Asia, JPMorgan Asset Management in an interview with ET Now.
"The only two worries I have in mind is - one, how the Fed rate hike will impact emerging markets including India. Second is earnings, because so far, the key missing ingredient to a much more forceful rally in Indian market is earnings," he added.
The S&P BSE Sensex has risen over 2,000 points in a matter of a month. However, further upside remains capped and markets are likely to consolidate before they resume an uptrend.
"After the first year of the new government, expectations were a bit ahead of what the reality was. It has taken time for things to change on the ground. I believe what has happened now is that expectations have come down," says Hiren Ved, Director & CIO, Alchemy Capital Management in an interview with ET Now on Thursday.
"It is not reality versus what happens, but it is expectations versus where you are in the markets. The expectations are now more muted, especially after the fourth quarter numbers. It is not a V-shape recovery, it is a long U-shape recovery in India. My sense is that we are base building before the next phase of leg up in the Indian markets," he added.
After this phase of consolidation, which might last for another quarter or two, markets should head higher.
Apart from local factors, analysts are of the view that valuation of Indian markets remains stretched. Most of the rally in the calendar year 2014 was based on optimism, where P/E expanded, while earnings remained muted.
Experts are of the view that growth in earnings is more likely to drive markets higher, and growth is expected to happen only after a couple of quarters.
"Indian valuations remain stretched at an 18.0x 12-month PE. In addition, consensus seems over-optimistic on 2015 EPS growth, forecasting 15-16% versus our estimate of 10-11%, based on our coverage universe," said an HSBC report.
"In our view, if earnings start to be in line with consensus forecasts over the course of the year, it could facilitate a change in sentiment towards India. A low base for FY15 should be supportive of growth," added the report.
We have collated a list of five factors which are likely to weigh on Indian market in the near term:
Monsoon in July remains muted, RBI may not cut rates:
After recording above-normal rains in June, July has remained more or less muted and that might become a concern for markets.
"It is pretty clear that the central bank will not go ahead and lower rates at the August meeting because the monsoon progress is pretty much questionable as July had a weak start," says Radhika Rao, Economist, DBS Bank, in an interview with ET Now.
Private weather forecaster Skymet may revise its monsoon forecast by the end of this month as it expects July rains to be less than its earlier forecast.
The India Meteorological Department (IMD) said on Thursday that monsoon rainfall so far has been 6% below the long-period average (LPA).
Below-normal monsoon rains will also impact earnings, which would also cap upside for markets.
Vibhav Kapoor, Group CIO, IL&FS, is of the view that if the monsoons do not turn out to be good, then even the September earnings will come into question.
"So, all in all, there is a balance between some positives and some negatives and therefore the market is going to stay in this range for some more time. Also, the valuations, if you look at least at the Nifty overall, they are not that cheap, they are about 17 times FY16 earnings," he added.
Parliamentary disruptions:
The opposition parties have enough reasons to disrupt the proceedings and stall any meaningful legislative work, said a Sharekhan report.
In the recent past, the emergence of controversies like the Lalitgate scandal and the Vyapam scam have provided enough fodder to the opposition parties.
The brokerage firm feels that any more delay in passing of the key bills like the Goods & Services Tax would be viewed quite negatively by investors.
"We have the monsoon session starting next week. That may create some sort of uncertainty in the market because the going for the government may be slightly difficult at this point of time because of the issues which were raised over last couple of months," says Vivek Mahajan, Head of Research, Aditya Birla Money.
"It may suggest that the rally is getting halted, but I will be a buyer in any correction in the market place," he added.
Muted corporate earnings:
Q4FY15 was a dismal quarter for India Inc, with topline, EBITDA and bottom line declining 4%, 10% and 11% YoY, respectively. In fact, these growth numbers were even below the Lehman crises lows, say experts. June and September quarters are unlikely to be any better.
"Currently, the PEs cannot expand beyond a point. We believe that June quarter as well as September quarter earnings momentum is likely to be quite muted and may be December onwards, because of the lower base of last year as well as some amount of supportive government policies that have happened in the recent past, you will start seeing some uptick in earnings momentum and that is when probably there will be a case for PE re-rating," says Harsha Upadhyaya, CIO - Equities, Kotak AMC.
US Federal Reserve rate hike:
Reiterating her earlier view, the US Federal Reserve Chairperson Janet Yellen on Wednesday said that the US Federal Bank may kickstart raising interest rates this year itself, which might fuel volatility across emerging markets including India.
For the last three or four months, the market has been gradually pricing in the first hike coming as early as December 2015.
"Yellen's commentary validates what our house view has been - that the rates will go up with the first rate hike pencilled in for December," says Radhika Rao, Economist, DBS Bank.
"It has been made clear that although Fed's policy trajectory will still be data dependent, the current economic indicators are sufficient to justify the starting of a rate hike cycle," she added.
The Fed is liklely raise rates in December, and will take interest rates higher by another percentage point over the course of the next year. Rates are likely to go up, but as not aggressively as in the previous rate hike cycles, she added.
Greece overhang continues:
German Finance Minister Wolfgang Schaeuble said in a letter to the president of Germany's lower house of parliament that the International Monetary Fund would not be involved in the payment of a first tranche of a planned third Greek bailout, said a Reuters report.
That tranche is due to be paid in mid-August, according to the letter, seen by Reuters, in which Schaeuble requested that the parliament agree to open talks on a third Greek bailout.
Markets are likely to face headwinds in the form of sub-par monsoon rains, parliamentary disruptions, muted June quarter earnings, US Fed rate hike and debt crisis in Greece. However, analysts expect indices to hit fresh record highs in the next 12 months.
In the interim, they are likely to trade in a range.
"We have always been a structural bull for the Indian market. I do feel that the risk-on sentiment is gradually creeping back to the markets after a very difficult several months on the back of Greece and Chinese market volatility," says Tai Hui, Chief Market Strategist - Asia, JPMorgan Asset Management in an interview with ET Now.
"The only two worries I have in mind is - one, how the Fed rate hike will impact emerging markets including India. Second is earnings, because so far, the key missing ingredient to a much more forceful rally in Indian market is earnings," he added.
The S&P BSE Sensex has risen over 2,000 points in a matter of a month. However, further upside remains capped and markets are likely to consolidate before they resume an uptrend.
"After the first year of the new government, expectations were a bit ahead of what the reality was. It has taken time for things to change on the ground. I believe what has happened now is that expectations have come down," says Hiren Ved, Director & CIO, Alchemy Capital Management in an interview with ET Now on Thursday.
"It is not reality versus what happens, but it is expectations versus where you are in the markets. The expectations are now more muted, especially after the fourth quarter numbers. It is not a V-shape recovery, it is a long U-shape recovery in India. My sense is that we are base building before the next phase of leg up in the Indian markets," he added.
After this phase of consolidation, which might last for another quarter or two, markets should head higher.
Apart from local factors, analysts are of the view that valuation of Indian markets remains stretched. Most of the rally in the calendar year 2014 was based on optimism, where P/E expanded, while earnings remained muted.
Experts are of the view that growth in earnings is more likely to drive markets higher, and growth is expected to happen only after a couple of quarters.
"Indian valuations remain stretched at an 18.0x 12-month PE. In addition, consensus seems over-optimistic on 2015 EPS growth, forecasting 15-16% versus our estimate of 10-11%, based on our coverage universe," said an HSBC report.
"In our view, if earnings start to be in line with consensus forecasts over the course of the year, it could facilitate a change in sentiment towards India. A low base for FY15 should be supportive of growth," added the report.
We have collated a list of five factors which are likely to weigh on Indian market in the near term:
Monsoon in July remains muted, RBI may not cut rates:
After recording above-normal rains in June, July has remained more or less muted and that might become a concern for markets.
"It is pretty clear that the central bank will not go ahead and lower rates at the August meeting because the monsoon progress is pretty much questionable as July had a weak start," says Radhika Rao, Economist, DBS Bank, in an interview with ET Now.
Private weather forecaster Skymet may revise its monsoon forecast by the end of this month as it expects July rains to be less than its earlier forecast.
The India Meteorological Department (IMD) said on Thursday that monsoon rainfall so far has been 6% below the long-period average (LPA).
Below-normal monsoon rains will also impact earnings, which would also cap upside for markets.
Vibhav Kapoor, Group CIO, IL&FS, is of the view that if the monsoons do not turn out to be good, then even the September earnings will come into question.
"So, all in all, there is a balance between some positives and some negatives and therefore the market is going to stay in this range for some more time. Also, the valuations, if you look at least at the Nifty overall, they are not that cheap, they are about 17 times FY16 earnings," he added.
Parliamentary disruptions:
The opposition parties have enough reasons to disrupt the proceedings and stall any meaningful legislative work, said a Sharekhan report.
In the recent past, the emergence of controversies like the Lalitgate scandal and the Vyapam scam have provided enough fodder to the opposition parties.
The brokerage firm feels that any more delay in passing of the key bills like the Goods & Services Tax would be viewed quite negatively by investors.
"We have the monsoon session starting next week. That may create some sort of uncertainty in the market because the going for the government may be slightly difficult at this point of time because of the issues which were raised over last couple of months," says Vivek Mahajan, Head of Research, Aditya Birla Money.
"It may suggest that the rally is getting halted, but I will be a buyer in any correction in the market place," he added.
Muted corporate earnings:
Q4FY15 was a dismal quarter for India Inc, with topline, EBITDA and bottom line declining 4%, 10% and 11% YoY, respectively. In fact, these growth numbers were even below the Lehman crises lows, say experts. June and September quarters are unlikely to be any better.
"Currently, the PEs cannot expand beyond a point. We believe that June quarter as well as September quarter earnings momentum is likely to be quite muted and may be December onwards, because of the lower base of last year as well as some amount of supportive government policies that have happened in the recent past, you will start seeing some uptick in earnings momentum and that is when probably there will be a case for PE re-rating," says Harsha Upadhyaya, CIO - Equities, Kotak AMC.
US Federal Reserve rate hike:
Reiterating her earlier view, the US Federal Reserve Chairperson Janet Yellen on Wednesday said that the US Federal Bank may kickstart raising interest rates this year itself, which might fuel volatility across emerging markets including India.
For the last three or four months, the market has been gradually pricing in the first hike coming as early as December 2015.
"Yellen's commentary validates what our house view has been - that the rates will go up with the first rate hike pencilled in for December," says Radhika Rao, Economist, DBS Bank.
"It has been made clear that although Fed's policy trajectory will still be data dependent, the current economic indicators are sufficient to justify the starting of a rate hike cycle," she added.
The Fed is liklely raise rates in December, and will take interest rates higher by another percentage point over the course of the next year. Rates are likely to go up, but as not aggressively as in the previous rate hike cycles, she added.
Greece overhang continues:
German Finance Minister Wolfgang Schaeuble said in a letter to the president of Germany's lower house of parliament that the International Monetary Fund would not be involved in the payment of a first tranche of a planned third Greek bailout, said a Reuters report.
That tranche is due to be paid in mid-August, according to the letter, seen by Reuters, in which Schaeuble requested that the parliament agree to open talks on a third Greek bailout.
http://economictimes.indiatimes.com/markets/stocks/news/five-immediate-concerns-that-can-take-the-wind-out-of-sensexs-sails/articleshow/48111725.cms
