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'Sensex will end the year at 11,400'
May 25, 2006
Manishi Raychaudhari of UBS maintains a year-end Sensex target of 11,400 level. He adds that a decline in the markets does not indicate a reversal.
He further says that the Asian and emerging markets are close to their bottom, and that valuations are looking more reasonable in India.
He sees value in largecap metal stocks.
Excerpts from CNBC-TV18's exclusive interview with Manishi Raychaudhari:
What are your thoughts on this correction and how much more money could go away from the markets in Asia?
That has always been a difficult call to take but if one looks at the month of May, the flows out of Asia have been about $4.8 billion till now. In the previous three occasions that is in October last year, in May 2004 and March 2005, the outflows were in the range of $4 to 4.5 billion.
So regionally we think we are close to the bottom as far Asia and emerging markets are concerned. It is difficult to predict what would happen in the very short term but in general in Asia and in India the valuations are looking a little more reasonable than they were about two weeks back.
As a strategist what are your thoughts after this 2000-point correction? Do you think there is a serious risk to undermine the bullish trend of the market or do you think it is a deep savage correction only?
We have not made any change to our target for the Sensex, which is at 11,400 for the end of calendar year 2006. I would point out that despite market correcting close to 20 per cent from the peak, the economic fundamentals have not changed. The economic growth remains intact and even corporate fundamentals have not changed.
If one looks at early March and compares the scenario with late May, our own earnings growth estimate, as far as Sensex is concerned, have actually increased by about 4 to 4.5 per cent, which has been primarily driven by cement, metals, select bank stocks, consumer staples and automotives. I think the kind of decline that the market has faced does not really indicate a reversal in the bullish trend but it is more of a correction.
Having said that the correction has been deeper in India because the Indian market to start with was overvalued relative to its Asian peers and there were significant leveraged positions that were built up in the Indian market.
What is that you are overweight on in metals, and any concerns on what is been happening with those prices in the commodity market?
Commodity prices had been declining over the last week, but over the last couple of days; Copper, Aluminium and Zinc have come up by 4-12 per cent, so there has been a strong bounce back in the commodity prices.
Even yesterday, the Chinese steel companies increased prices. So we believe that the kind of price correction we saw in the commodities was more of speculative unwinding and there is no threat to global growth, which could lead to a sustained downtrend on the commodity side. We retain our overweight recommendation on the metal side and at this point of time there is value to be found in the largecap stocks.
As you hold your year-end target, how much of a correction are you comfortable with on this market to convince you or make you feel you that nothing is wrong with the long-term trend but it is just a savage correction?
When one looks at valuations, when we were at the recent peak on May 10, the valuation was close to 18 times one-year forward and now after correcting close to 15-20 per cent, they are close to 14.5 to 15 times one-year forward. The sustainable earnings growth for the Indian market remains in the range of 18-20 per cent, which suggests we are in a reasonable valuation territory right now.
What would happen over the short-term is governed by the kind of leveraged positions that are still remaining in the market. It is also governed with the kind of relation we have with the derivatives market because the Nifty futures are still at a discount to the spot, which could lead to some short-term volatility.
From a fundamental perspective valuations have come down to more reasonable levels and there are certain sectors and stocks where buying opportunities can be found.
You spoke about the factors like commodity sell off and higher US interest rate fears, which have tipped the emerging markets into a corrective phase this time around. Compare this scenario with what happened last few times when emerging markets corrected for the same reasons, are those set of factors less benign this time around than they were the previous few times?
The character of the correction and the reasons behind it appear pretty much the same. If I compare this to what happened in March 2005 or in October 2005, the reasons behind the corrections were, the concerns about the US interest rates going up much further than what the consensus expectation was at that point in time. These were triggered by the kind of pronouncements that came out from the Fed at that point in time.
The way it is this time around, the reasons are pretty much the same. This basically has triggered a concern about emerging market flows and indeed we have seen close the $5 billion flowing out of the Asian emerging markets over the last ten days.
There is not much of a difference between the earlier two instances of sharp correction but from a higher level of valuation, obviously the correction has been much higher in magnitude.
To come down to the more reasonable levels, we have needed a larger magnitude of correction. That is possibly the only difference. In a nutshell the difference is that compared to the previous instances, India and possibly the other Asian markets are at a higher valuation levels when the correction started.
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