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In adverse and negative news flow the index could drop another 31 per cent to 6,355, whereas the positive sentiment and financial developments can take it higher by 54 per cent to 14,225.
"To turn the tide, India needs pump-priming without the use of public debt ... better relative valuations, global calm, a good election result to ensure smooth policy action in the coming years," Morgan Stanley said in a research note.
The probability of the Bull Run is slim at 10 per cent and the stock market is biased towards flat to downside rather than an upside. In all probability, the weighted BSE Sensex outcome for December 2009 is 8,559.
No one expects a V shaped recovery in the stock market. Even if we assume that we have hit the bottom history shows that stock markets always tests the previous low before a new bull market gets under way.
Investors, who are genuinely looking at long-term investments, this may be a golden opportunity as Indian growth story is likely to continue for the next few decades with minor blips here and there. India has a robust capital market and infrastructure backed by a strong structural liquidity story emanating from demographic riches and rising private savings.
A Reuter’s poll concludes that the 30-share BSE Sensex is seen at 10,750 points by mid-2009 and 11,000 by the end of next year, according to the median forecast given by 13 analysts.
The consensus expectation is for a rise of 17 percent by the end of June and 20 percent by the end of 2009 from Monday's close of 9,162.62 points.
But the index has fallen 55 percent so far in 2008 and in a similar poll in September, when the index was near 14,000, analysts expected the index to rise to 18,000 in 2009.
Analysts at Kotak Institutional Research indicate the fair value of the BSE Sensex at 12,000 by the end of 2009. They have revised the forecast for the Sensex's earnings growth at 10.9 per cent for 2008-09 from the earlier 13.4 per cent. The earnings growth estimate for 2009-10 has been revised to 11.3 per cent from 12.7 per cent after the recent changes to the earnings estimates of Reliance Industries, ICICI Bank, Tata Steel and auto companies.
Analysts do not rule out a further downside risk to earnings in the current uncertain environment. However, they see large potential upside risks to the earnings in the banking sector, especially state-run banks, in the light of a sharp decline in yields of government securities to 6 per cent by March 2009. The low downside risk to earnings among the Sensex components will be for Bhel and Sun Pharmaceuticals, while the earnings of Cairn, ONGC and Satyam Computer are likely to disappoint.
Research analysts at Credit Suisse expect the Sensex at 9,000 by the middle of the calendar year 2009, with the index likely to look up after the second quarter of 2009. Analysts see Corporate India's earnings to shrink briefly in 2009 on account of the rising cost of capital before rebounding to normalcy.
Most analysts polled expected that by mid-2009 volatility would abate and foreign funds would no longer be sellers, and conditions would be more favorable for the market to rise.
In conclusion, while Indian stocks may be trading close to their floor valuation, the market needs tangible positive catalysts to reverse the negative sentiment and liquidity trends. The market is unlikely to perform in the next six months because of the absence of positive catalysts. However, on a medium-term view till March 2010, the Sensex target is seen at 13,500. This estimate factors 5 per cent growth for 2008-09 and flat growth in 2009-10 and assumes a trailing 12-month recovery P/E of 15 times.
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