BofA-ML retains December Sensex target at 33,000

American brokerage Bank of America-Merrill Lynch (BofA-ML) on Monday retained its Sensex target at 33,000 by December, but said in the medium term, the Dalal Street will see more volatility.

“We continue to maintain our December Sensex target of 33,000 points. But near-term the markets will remain subdued and range bound with a negative bias, as quarterly earnings are low and more earnings downgrades are likely over the medium term,” BofA-ML analyst Jyotivardhan Jaipuria said in note.

“Also, the India versus GEM premium is near all-time at 35% the GE averages,” Jaipuria said. The markets are likely to witness another quarter of weak growth in the ongoing earnings season. Mirroring the previous quarter when aggregate Sensex profit fell 1% year-on, profit growth is once again going to be subdued at 1%, he said, adding he sees more earnings downgrades for the next few months before stabilising and earnings upgrades may not start until next year.

On a top-down basis, we expect 2015-16 consensus growth estimates of 18% to get downgraded to 12-13% growth, he added. However, he noted that foreign institutional investors (FIIs) have the all-time high overweight on the domestic market. This is on the back of nine consecutive quarters of positive FII inflows.

Strong FII inflows have resulted in all-time high foreign ownership for the markets at about 28%. While GEM funds have a 12.8% weight on the country against the index weight of 7.7%, which is a massive 510 bps OW.

Noting that the Sensex has rich valuations, he said post-2014 polls, the markets re-rated and have been trading at 16 times one-year forward PE. And despite the recent bloodbath, the valuations are still a 10% premium to long term averages. Also, in the GEM context it is currently at a 35% premium to GEM, he said.

On the Modi government’s first year reforms report card, Jaipuria said slow and steady reforms were anticipated and the reported loss of faith in the Modi regime to accelerate reforms is partly due to unrealistic expectations. “Returns last year were led by re-rating, but returns this year would be led by earnings. With earnings being sluggish, the markets would give a flat to slightly negative return for the majority part of the year and the YTD return has been negative 1.5%.

“We see earnings improving only late 2015 and the market returns being back-ended with a flat to slightly phase in Q2 and Q3 of 2015,” Jaipuria noted. He attributed three reasons for the present investor jittery-sluggish recovery, the minimum alternate tax (MAT) controversy and delay in getting the new land law in place. The economy continues to be sluggish and earnings growth in the December quarter was the weakest in 20 quarters and the current quarter is unlikely to be different, he said, adding the dispute on MAT has reignited fears of harsh taxation rules.

On the new land law, he said this underlines difficulty in reform legislation. Investors have been keenly watching the progress of the new land acquisition bill and are hoping the government can quickly pass the Bill through a joint session of Parliament.

He also warned that investors could be disappointed if the land acquisition bill and the goods and services tax bill are not passed in the Budget session, Jaipuria said, adding the chances of these Bills getting House nod look distant.

Source: http://www.livemint.com/Money/hBHnH7dvge8FKWZnKIM7ZL/BofAML-retains-December-Sensex-target-at-33000.html

Mutual funds slow down pumping money in stocks in May

Mutual fund managers have reduced their pace of buying this month, amid sharp rise in volatility. After pumping in more than Rs 9,000 crore in Indian stocks in April, fund managers have bought shares worth around Rs 3,300 crore so far this month. The drop in investment pace, industry players, say is a tactical call and not a directional one. They add that it is a continuation of "buy on dips" strategy.

Thus far this month, in the 16 trading sessions, equity fund managers have net invested about Rs 3,300 crore, which is nearly a third of what the previous month witnessed. Compared to the immediate previous month, the quantum of net investment is low but is in line with the average monthly investments ever since the Narendra Modi-led BJP government took office in New Delhi last year.

The investment figure in last month was unusually high after the market had come off nearly 10 per cent from the highs.

According to fund managers, it is a tactical call and should not be read as directional. It has come at a time when corrections in the key indices appear to have been arrested to some extent. Rather, the benchmark indices are showing some resilience and are up about two per cent compared with April-end. In the recent past too, fund managers had reduced their buying spree whenever markets moved up.

G Pradeepkumar, CEO of Union KBC Mutual Fund, says, "Since the start of the current rally, fund managers have been aggressively buying on dips. Last month, when markets witnessed corrections, we have been buyers. Further, strong inflows in the equity segment also fuelled investments."

Another possible reason for the slowdown in investments could be relatively less robust inflows in equities from investors. Sector executives say reduction in inflows cannot be ruled out in May. Rajiv Shastri, managing director & CEO of Peerless Mutual Fund, says, "Slowdown in inflows could be a possibility. When situation looks a little uncertain, investors tend to hold back their investments."

The Reserve Bank of India (RBI)'s next policy review on June 2 is also being eyed by fund managers as the next decisive trigger. According to them, it is to be seen how the RBI moves as there appears to be visible pressure from the government for an imminent rate cut.

In FY15, the total net investments by fund managers were to the tune of about Rs 41,000 crore, the highest in sector's history with net inflows for the year at Rs 71,000 crore.

Nearly 10 per cent correction in stock indices post the Union Budget against the recent peaks were taken as big opportunities by the fund managers to pick stocks. Even investors increased investments during the March-April period, which were as high as Rs 19,000 crore.

Currently, the industry has over 400 equity-oriented schemes managing assets worth Rs 3.45 lakh crore.

Source: http://www.business-standard.com/article/markets/mutual-funds-slow-down-pumping-money-in-stocks-in-may-115052601188_1.html