After a stellar run that has propelled the benchmark indices – the S&P BSE Sensex and the Nifty50 – higher by over 30% since the past 13 months to over 36,000 and 11,000 mark respectively, experts are now turning cautious on the road ahead and see a limited headroom for the markets from here on.
In a recent strategy note, Aditi Singh of Ambit Capital suggests that the ongoing bull-run could be in the final stages of the rally seen since September 2013 when Raghuram Rajan took over as the Reserve Bank of India governor. The Sensex has rallied over 77% since then. Others such as UBS Securities and Citigroup, too, do not expect a runaway rally from these levels.
Singh classifies a bull-run are broadly into three phases – the first of which is a broad rally when investors tend to bet on a few sectors to beat the market. This is temporarily followed by a pause phase where the markets correct 10 – 15% driven by specific fears.
The final phase, according to Singh, is the narrow rally when out of the champion sectors that led the broad rally phase, only a few are able to sustain. These sectors become bubbles as investors bet on all economic activity converging into them. Typically, these sectors show a steep rise in valuations along with an increase in market-cap share. Post the peak, these sectors tend to underperform or perform in line with the market.
The above benchmarks when applied to the markets’ run since September 2013 are signalling the end could be near, Singh says.
“Three factors imply that we may be in the final stages of the rally.
First, it has been a year since the market took off post the ‘pause’ in the closing months of 2016, and history shows that bull markets seldom last more than two years post the pause. Secondly, the “champion” sector in the rally tends to rocket up in the final stages of a bull market; we are seeing such behaviour in the financial sector. Thirdly, the trailing P/E of the market as a whole rises sharply in the final phase. Over the past 12 months, the trailing P/E of the Sensex has risen from 17x to 24x. It is difficult to time the top of the market but to the extent that history is a guide, we seem to be in the final stages of this rally that began in September 2013,” Mukherjea says.
That said, over the next few months, markets will eye the upcoming Union Budget proposals, assembly elections scheduled for 2018, macro-economic indicators, corporate earnings growth, policies of global central banks and oil prices to chart their trajectory.
Though GDP (gross domestic product) growth and earnings should pick up in FY19, this may largely optical—reflecting the low base from goods and services tax (GST) disruption rather than a recovery in trends, analysts say.
“Our end-2018 Nifty target of 10,500 is based on 18x one-year forward PE, implying no returns from the index in 2018. Our upside / downside scenario assumptions for the Nifty of 11,900 / 8,800 do not offer an attractive risk-reward, but we remain positive on India over the long term,” says Gautam Chhaochharia, head of India research at UBS Securities.
Analysts at Citi though remain positive on emerging markets, they say corporate earnings now need to pick up in India to increase its attractiveness in the EM universe.
“We expect around 6% returns – our December 2018 Sensex target is 36,900, based on 16.5x earnings,” says Surendra Goyal, managing director, head of India research, at Citi in a co-authored note with Vijit Jain.business-standard