Indian Stocks Ripe For Time Correction; Valuations No Longer Cheap: BofAML
The Nifty 50 climbed nearly 9.5% YTD, in fact, around 13% from its demonetisation lows.
It’s been a good start to 2017 for benchmark Indian indices, with most of them being within sniffing distance of their all-time highs. What makes it more impressive is the recovery posted over the last two months, since the government’s demonetisation drive took the wind out of the sails in November and December last year.
The NSE Nifty 50 index has climbed nearly 9.5 percent year-to-date—in fact, around 13 percent from its demonetisation lows, post November 8, 2016—as India Inc.’s third quarter earnings scorecard turns out to be better than anticipated.
But the question now is: how much more room do the indices have left on the upside? Well, according to Bank of America Merrill Lynch (BofAML), not a whole lot. The global brokerage house said equities the world over are on the verge of entering into a “euphoric” zone, which more often than not is followed by a breather.
This has prompted BofAML to maintain its year-end Sensex target at 29,000, a meagre 1 percent upside potential from current levels. “We see near-term returns capped from here due to (a) possible near-term reversal of global wave (b) market’s under-appreciation of residual impact of demonetisation (c) rich valuations, and (d) continued risks of earnings downgrades,” BofAML said in a research note.
The Sensex 12-month forward price to earnings of 17 times is 13 percent above its long-term averages.
Nipun Mehta of Blue Ocean Capital also shares BofAML’s view on the Nifty, saying there are some signs of fatigue that can clearly be seen on the benchmark index.
Like BoAML, Mehta believes the market is likely to undergo a time correction since it has moved up very quickly over a very short period.
Another issue that could cap market returns, BofAML said, will be on the number of primary offerings on the exchanges. “We expect primary issuances to increase substantially in 2017 on the back of strong government disinvestment pipeline and high valuations attracting new issues (INvITs/REITs),” BofAML wrote.
This increase, it said, will end up absorbing most of the domestic flows and capital market returns.
