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Hold on! Stock market will not give up gains easily

By Puneet Wadhwa
May 13, 2015 13:27 IST
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Foreign brokerages such as Bank of America-Merrill Lynch and Nomura remain upbeat on the road ahead for markets. Macquarie, too, recommends a 'buy on dips' strategy. 

Lower-than-expected corporate earnings growth in the recently-concluded quarter, weakening rupee, a rise in oil prices to 2015 highs and the bond market-led nervousness are some of the factors that have the potential to derail equity market rally across the globe, including India.

Despite this, foreign brokerages such as Bank of America-Merrill Lynch (BofA-ML) and Nomura remain upbeat on the road ahead for markets.

Macquarie, too, recommends a ‘buy on dips’ strategy. In two separate reports, both BofA-ML and Nomura have reiterated their year-end S&P BSE Sensex target at 33,000 and 33,500, respectively.

Jyotivardhan Jaipuria, India head of research at BofA-ML in a co-authored report with Anand Kumar titled The Modi Government: Reforms Report Card suggests that stock market seems to be losing a bit of faith in the ability of the Modi government to accelerate reforms, which they partly attribute to unrealistic expectations of investors.

Going ahead, they expect corporate earnings growth to be a key determinant of how the markets play out.

“With earnings being sluggish, as anticipated by us, markets would give a flat to slightly negative return for the majority of the year. We see earnings improving only by late 2015 and stock market returns being back-ended with a flat to slightly phase in Q2 (second quarter) and Q3 (third quarter) of CY2015,” the report said.

Besides an improvement in earnings, they also expect the pace of reforms to dictate market trend going ahead.

“We continue to believe that the government would likely deliver on both administrative and legislative reforms in the coming few quarters. Our year-end target of 33,000 for the Sensex is based on a 17x 1-year forward price-to-earnings,” they said.

On the other hand, Prabhat Awasthi, managing director and head of equity research at Nomura Financial Advisory and Securities, in a co-authored India equity strategy report with Nipun Prem and Sanjay Kadam believes investors’ expectations that the new government would quickly jump-start the investment cycle within a short period of six-to-nine months of assuming power were unrealistically optimistic to begin with.

They expect a meaningful pick-up in capex only in the second half of FY16 or the beginning of FY17. Strategy-wise, they remain positive on the market and maintain December-end S&P BSE Sensex target of 33,500.

Their key overweights this year include financials, autos, industrials and technology sectors; while consumer staples, pharmaceuticals, metals and telecom are the key underweights.

Axis Bank, HCL Technologies, Maruti Suzuki, NBCC and Union Bank are their top five stock picks.

Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India) in a recent co-authored report with Arjun Bhattacharya suggests that investors acknowledge India to be a better emerging market story over the medium-term.

“With valuations now looking attractive, buying interest should be round the corner. Buy the dips. GST (goods and service tax), if passed by the Rajya Sabha, could be the single important catalyst in the near term. "

"A normal monsoon, interest rate cuts, higher earnings growth from Q2FY16 given very low base and pick-up in execution of government-led infrastructure projects can all contribute to restoring confidence,” the report said.

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