In normal course of events, the trends in a country’s equity markets should mirror the real economy.
Backed by a sharp rise in foreign portfolio inflows in the last two months, the Bombay Stock Exchange’s benchmark Sensex is again set to first reclaim and then canter past the peak it had run up three years ago when it closed at an all-time high of 21,004.96 on November 5, 2010.
So, what are the chances that the Sensex will end on a magical new high by the turn of the new year? Analysts, however, aren’t too bullish.
Global investment banking major Morgan Stanley, which had projected last year that there is a 60% probability of Sensex breaching 23,000 by December 2013, isn’t bullish on Indian equities achieving this feat given the current conditions.
“Sentiment is rocky. FII ownership is an overhang. We are looking for capitulation at some point in the coming months,” Morgan Stanley said in a recent research report.
According to the report, India Equity Strategy Playbook, there is a 50% probability of Sensex hovering around 18,300 and only a 15% probability of it breaching 23,000.
Markets may have recovered, but they have to navigate lower real sector growth, choppy earnings season worsened by possible currency volatility, analysts said.
India’ GDP grew at a four-year low of 4.4% in April-June and likely remained flat in the next quarter. Industrial output crawled at 0.6% in August, inflation was at seven-month high of 6.46% in September and investment activity remains muted.
“With consumers finally feeling the squeeze and slow execution of industrial projects, the downward pressure on both GDP and corporate earnings isn’t over yet,” broking and research firm Espirito Santo Securities said in a research note.