Chinese market crash, growth concerns force brokerages to cut Sensex year-end target

The recent turmoil across global markets fuelled by correcting commodity prices hasforced brokerages to revise their year-end targets for benchmark indices. Fear of persisting weakness in China’s growth coupled with slower than expected turnaround in India’s economic fundamentals have also forced brokerages to revise their year-end targets.

Barclays’ analysts expect an earnings bounce back in the second half of the fiscal especially in sectors such as consumer, financials, healthcare and capital goods. “However, postponement in earnings recovery leads us to reduce our 12-month forward Nifty index target to 9,642 from 10,219,” said a Barclays report.

Madan Sabnavis — Chief Economist, CARE Ratings, seems to agree. Commenting on core sector performance, he said, “The industrial recovery is yet to take off indicating that infra in particular has not seen much traction. The higher government spending is yet to get translated into higher growth numbers. We may still have to wait till September-October to discern any definite trends.”

However, maintaining its Sensex year-end target to 33,500 Nomura in a report said, “We note that India tends to benefit from cheaper commodity prices which improve balance of payments and lead to lower inflation. Earnings may not react symmetrically depending on whether a company is a consumer or producer of commodities.

“As well, benefits to consumers in the form of lower commodity prices should manifest in a demand revival, but in a lagged fashion, in our view. Following recent price correction, the Sensex P/E multiple has corrected to 14.8x one-year forward earnings, which is at a 10 per cent discount to its five-year average.

However, there are naysayers as well. Ambit Capital in a report said, “As the fantasy of a ‘secular bull market’ fades, we cut not just our FY16 GDP growth estimate to 6.8 per cent from 7 per cent (driven largely by a drop in industrial growth), but also our end-FY16 Sensex target to 28,000 from 32000).

The combination of a enfeebled banking system, a sliding real estate sector and a PM determined to reset the way the economy works makes India a risky investment destination.

“With the growing likelihood of a significant devaluation in the yuan, Indian promoters are rethinking their modest capex plans. This is likely to result in a further decline in private investment growth, which in turn will bring down the industrial and services sector growth rate,” Ambit said.

Brokerages also shifted their rupee-dollar exchange rate target to ₹68-70 from ₹65-66 to a dollar.

Dhananjay Sinha of Emkay Global said the near-term market scenario would be affected by reasonable probability of Fed rate lift off from September and potential risk to emerging market; sustained strengthening of dollar as Fed moves towards normalisation; and RBI’s continued concern on inflation is likely to refrain it from any further reduction in rates.

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