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Is Murphy’s Law at play on D-Street, asks BofA-ML


 http://economictimes.indiatimes.com/markets/stocks/market-news/is-murphys-law-at-play-on-d-street-asks-bofa-ml/articleshow/22136518.cms?intenttarget=no&utm_source=newsletter&utm_medium=email&utm_campaign=dailynewsletter

NEW DELHI: The Indian markets have plunged nearly 8 per cent so far in August, led by tapering worries by the US Federal Reserve, geo-political tensions in Syria and concerns over a sharp decline in the Indian currency against the USD.

BofA-ML relates the current Indian scenario to Murphy's law.

One question that investors ask: Can markets fall further from here?

Considering that equity investors have not yet panicked in India is a positive sign for now. However, one key risk for markets is that FII holding at 21 per cent is close to all-time highs. India remains vulnerable to any GEM sell-off, cautions the global investment bank.

Movement of the currency, which registered its worst fall in the last 20 years on Wednesday, is key point for markets.

Looking at past instances, the market has fallen in all the 3 instances on an average 21.5% (ranging from 4.5% to 47%). Interestingly, markets recovered practically the entire loss 3 months later on all the 3 occasions.

BofA-ML's base case for the Sensex is that it will be range-bound between 18,500 to 20,500 levels. However, markets are likely to stay below this range if the currency does not stabilize.

Given that the developed world is recovering, the global investment banks put a target of 16,000 for the Sensex if the market tends to go to 10x. The market is trading slightly below the long-term average forward PE of 14.1x.

The global investment bank expects more downgrades to their bottom-up analyst earnings. Based on our current analyst estimates, Sensex EPS is expected to be Rs 1,305 and Rs 1,540 for FY14 & FY15, said BofA-ML.

BofA-ML expects this to get downgraded to Rs 1,260 and Rs 1,400 on top-down basis. Taking these downgrades into account, Sensex PE is artificially depressed and is close to the long-term average in reality.

Any policy measures to shore up the rupee by say quasi sovereign/NRI bonds is the key and could lead to a spike in the rupee and help markets.

However, INR is likely to trade weak because of the following three reasons outlined by B0fA-ML.

The fact that oil and gold pries are rising again will keep the 'twin deficit' problem of India in focus leading to a weakness in INR. With the Middle-East tensions rising, Brent prices have also rallied 14 per cent since April.

Secondly, steady FII outflows are likely to keep rupee volatile. So far outflows are mostly in the debt market and equity has seen minimal outflow. However, sustained uncertainty could likely accelerate equity outflows as well.

In the past, the government was largely depended on FII flows coupled with the more stable FDI flows for financing the current account deficit (CAD) till FY11. Foreign investments (FII+FDI) as a percentage of CAD have fallen to 57 per cent in FY13 which could fall further in case of further portfolio outflows, making the twin-deficit position more vulnerable.

And lastly, a weaker INR would raise the fuel subsidy and the fiscal deficit substantially. Data from BofA-ML suggested that a 10 per cent depreciation of Rupee impacts inflation by 100 bps.

"A higher inflation will constrain the ability of the government to cut interest rates to kick-start the economy," added the BofA-ML report.
Is Murphy’s Law at play on D-Street, asks BofA-ML Reviewed by sambasivan srinivasan on 8:20:00 PM Rating: 5

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