BNP Paribas’ Market Outlook report says that recent outperformance in the stock market seems to be based on hopes of policy implementation. But such hopes seem to be getting continuously postponed, and 2012 has been a year of “shifting milestones”
BNP Paribas Securities India’s Market Outlook Report says that the ongoing correction in the stock market is likely to continue. While the Indian market is one of the best performing equity markets among Asian and Emerging markets this year, recent outperformance seems based on hopes of policy implementation. But such hopes seem to be getting continuously postponed. 2012 has been a year of “shifting milestones”. At a 12-month forward PE (price-to-earnings ratio) of 13.6 times the Sensex is neither cheap nor expensive (long term average is 15.2 times). Historically, the Indian market bottomed out at 12-12.5 times and the market is about 10% higher than those levels. Overall, BNP Paribas warning is to “brace for a correction” in the market.
On the demand side, BNP Paribas observes that the monsoon have improved, but consumption weakness is becoming apparent. The rainfall-related concern seems to be getting behind us post-massive monsoon precipitation in north and north-west India since mid-August. The current all-India monsoon deficit (-13%) presents a much better picture than in early July (25%-30%).
There are initial signs of declining demand in consumer discretionaries—particularly two-wheelers. This is clearly worrying because consumption seems to be the only leg that the Indian economy is running on, warns BNP Paribas. Even in the property sector smaller unlisted developers have begun to default on their loans to banks, as BNP Paribas channel checks reveal.
On the price side, BNP Paribas warns that liquidity injections could keep the market buoyant for a while. Predictably the high beta sectors—banks, metals, property, auto and engineering—tend to outperform. The best portfolio stance to balance the possibilities of domestic disappointment and global liquidity injection seems to be a “feet in two boats” approach.
BNP Paribas sector recommendations include downgrade of the automobiles sector to neutral, upgrade of IT sector to overweight and increase weight on the pharmaceutical sector Also, the recommendations include overweight on pharmaceuticals, engineering, utilities and IT services sectors. BNP Paribas is neutral on automobiles, telecom and energy. Finally, the lower side recommendation is underweight on consumer staples, banks and metals, says BNP Paribas.
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