Expect a limited downside from here

Barring major surprises, the market is likely to remain range-bound over the next quarter, say experts.

Macro headwinds like rising interest rates, firm input costs (including metal and crude oil prices), slowing earnings growth and relatively higher valuations have taken a toll on domestic markets in recent months. They are likely to continue hurting the markets for some more time.
From being among the top 10 performers in calendar year 2010, the Indian market has been among the worst performers this year. But the bad news may end here. If experts are to be believed, the good news is that barring major unpleasant surprises, the markets may not go down significantly from current levels.

Ramesh Damani, member, BSE and a known investor, says: “Earnings have been decent. The total lack of retail participation and speculators moving to commodities has kept the stock markets range-bound. Interest rates are the biggest worry. The Sensex is likely to remain in range of 18,000-20,500. If at all it breaks out, I see it breaking upwards.”

UPSIDE CORRECTION?
The fact that the market is trading a little below its long-term average valuation of 15 times one-year forward earnings and that India Inc’s earnings in 2011-12 are seen growing at 12-15 per cent provides comfort that the downside could be limited from current levels.

Nilesh Shah, president, corporate banking, Axis Bank, says: “Today, a lot of bad news is already priced in, so we are seeing a range-bound movement. So, this is more of a time correction than a price correction.”

To answer the question on where the markets would bottom out, Manishi Raychaudhuri, managing director, BNP Paribas Securities, said in a report, “If we assume four per cent downside to our EPS estimates in FY12 and FY13, and the Sensex trading down to a 10 per cent discount to its long-term average (i.e to a PE of 13.5 times), it would imply a near-term ‘floor’ Sensex level of 17,000.”

For now, most experts believe that given the domestic macro concerns and uncertainties on the global front, the Indian market could remain range-bound for the next few months—at least, till inflation declines to comforting levels. This, they believe, is more likely to happen in the second half of calendar year 2011. In the interim, the investment cycle is expected to slow, as capital costs remain at elevated levels due to the many rate increases by the RBI.

Morgan Stanley India’s strategy report says the rate rises mean greater vigilance on private capex. "The downside risk is that capex slows, creating further supply bottlenecks as we head into 2012, and higher inflation – not a pleasant situation for equities. That said, a lot of these risks may be in the price of industrials. The Nifty remains in the 5,300-6,300 range, given the current macro.” In this scenario, how should investors position their portfolios? Here, experts believe individuals should focus on picking the right stocks than on themes.

Shah says: “This is a fairly priced market . There is not much to choose from a sector point of view with a big weight. Sectors where growth is visible have high valuations. Those with growth concerns have low valuations. Pharma stands out as a high visibility sector. Buyouts provide an inherent floor to the prices. The focus should be more on stock selection than sector selection. Free cash flow generating companies will be a better bet in the time ahead.”

With contributions from Sundaresha Subramanian & Malini Bhupta