December 9, 2015

Brokers: Sensex to post 10-25% gain in 2016

At the close of a year that has been a washout for Indian equity markets— benchmark indices underperformed expectations by a wide margin—analysts are hoping that some of these projections will be realised in 2016, with brokerage houses predicting gains of 10-25% in the New year.

The BSE’s 30-share Sensex has fallen nearly 8% so far in 2015, after gaining 29.89% and 8.98% in 2014 and 2013 respectively. With only 16 trading sessions left in December, it seems likely that the year will close with losses. On Tuesday, the Sensex closed 0.86% or 219.78 points lower at 25,310.33 on fears that planned economic reforms will continue to be held hostage to politics— acrimony between the ruling party and the opposition.

Analysts, however, seem to be of the view that the environment for both reforms and earnings will improve next year, setting the stage for at least moderate gains.

Kotak Institutional Equities, an arm of Kotak Securities Ltd, expects a 10-12% upside for Sensex from Monday’s close, putting the target at around 28,050-28,550 points.

Deutsche Bank expects the Sensex to hit 29,000, a gain of 14% from current levels, by December 2016. It had been forced to cut its December 2015 Sensex target to 28,000 in September from 31,000 earlier. The revised target, too, seems to be unachievable.

“As we head into 2016, investor optimism over the policy and macro environment has been replaced by a more conservative realism focused on earnings recovery as the most determining market catalyst. The sharp variance between high expectations and actual earnings has started to test investor patience,” Deutsche Bank analysts Abhay Laijawala & Abhishek Saraf said in a note on 3 December.

“Until certainty emerges over a sustainable macro recovery, investors are likely to pay a premium for earnings visibility and growth. While there is understandable investor scepticism on an earnings recovery, we believe that corporate earnings are likely to turn around in 2016,” the Deutsche Bank analysts said.

They see earnings benefitting from a recovery in urban consumption, a positive multiplier impact of the government’s push for public investments, a possible pickup in inflation and a favourable base effect.

So far, corporate earnings have been disappointing. For the Sensex-30 companies, net sales dropped 5.36% in the September quarter, while net profit slipped 0.78%.

Economic indicators have been mixed as well.

India’s gross domestic product (GDP) growth accelerated to 7.4% in the three months ended 30 September, from 7.0% in the previous quarter. However, India’s Nikkei manufacturing Purchasing Managers’ Index (PMI) fell to a 25-month low of 50.3 in November, close to the 50 mark that separates expansion from contraction.

In a note on 10 November, Morgan Stanley said its November 2016 Sensex target was 31,000, but expressed concern over slow earnings growth.

“India’s strong macro has been driving outperformance since September 2013. However, spotty earnings, India’s low beta character and the Bihar election outcome have hurt stocks recently,” Morgan Stanley analysts Ridham Desai and Sheela Rathi said in a note.

“We stay positive on an earnings recovery in F2H16, although so far our F2016 earnings call has not been prescient,” Desai and Rathi added.

The ability of markets to rebound will also depend on fund flows. Foreign institutional investors (FIIs), have pumped in a mere $3.24 billion into Indian equities in the calendar year so far. As things stand, 2015 is all set to be the worst year for such inflows in four years. Inflows to emerging markets such as India have taken a hit due to the poor sentiment towards emerging markets and, more recently, because of the impending rate hike from the US Federal Reserve.

Some analysts expect these fears to abate going into 2016.

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