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MUMBAI: Domestic stocks may continue to rally for the next couple of months, but such a surge may fizzle out sooner than one expects as valuations would soon look very expensive from a one-year perspective, says Gautam Chhaochharia, Managing Director and Head of Research at UBS Securities, India.
The current rally in stocks, Chhaochharia says, is being powered mainly by optimism over possible re-election of the Modi government and a strong gush of liquidity.
“For the next couple of months, the market outlook seems positive.
It will have the momentum irrespective of valuations or underlying fundamentals,” he told ETMarkets.com in an interview.
“But if you look beyond two months, and from a one-year perspective, then the market has again become very expensive and quite rich,” he said.
The market veteran says Dalal Street is factoring in Modi again heading a very strong government.
“If not a majority, a very strong coalition where he can continue with the positive confident reforms,” he said.
Besides, very supportive liquidity and a low interest rate environment are also fuelling the current optimism in equity.
Yet, Chhaochharia has a December target of 10,500 for Nifty.
On Friday, NSE’s 50-share index closed at 11,456.
That pegged Nifty PE at 28.08 against a 20-year average of 21.06.
On Friday, Fitch Ratings cut India's economic growth forecast for the next financial year that starts on April 1 to 6.8 per cent from its previous estimate of 7 per cent, on weaker-than-expected momentum in the economy.
“While we have cut our growth forecasts for the next fiscal year (FY20, ending in March 2020) on weaker-than-expected momentum, we still see Indian GDP growth to hold up reasonably well at 6.8 per cent, followed by 7.1 per cent in FY21," Fitch said in its Global Economic Outlook.
Earlier, the global rating agency had cut India's FY19 GDP growth forecast to 7.2 per cent from 7.8 per cent on December 6.
According to Chhaochharia, the market is factoring in a big pickup in earnings cycle next year to year-and-a-half, which can theoretically support the implied valuations.
“Whatever we have seen from RBI is a reversal from a tight policy to a neutral policy.
Yet, we are nowhere near a stimulative policy and even the rate cuts – whatever we have seen till now, whatever we might see going ahead – will still not create a scenario of real interest rates going back even to 150 bps, which is what RBI’s target is,” he said.
“And it is unlikely to be stimulative for the economy from an RBI perspective.”
An elusive earnings revival has been one of the biggest frustrations for India Inc and stock investors for over five years now.
At the start of every year analysts make projections of a turnaround in corporate earnings only to downgrade such hopes as the year progresses.
“The earnings cycle, in our view, is still a big disappointment for the markets,” Chhaochharia said.
He also warned against excessive optimism over Modis return.
“The market is discounting a re-election for Modi, and it could be in for a negative surprise if that does not reflect in election results,” he cautioned.
“Based on market movements over the last few weeks, markets are clearly hoping and want Mr Modi to come back, ideally in a majority government or at least in a strong coalition government,” said the UBS leader.
“If that does not happen, the market will react adversely, definitely in the near to medium term.
And then the fundamentals will come back to haunt,” he said.
