Market may drop over 20% in next 1 year
The stock market is likely to witness a drop of more than 20 per cent over the next one year, notwithstanding the strong long-term fundamentals, global investment banking major Morgan Stanley has said.
By PTI |
NEW DELHI: The stock market is likely to witness a drop of more than 20 per cent over the next one year, notwithstanding the strong long-term fundamentals, global investment banking major Morgan Stanley has said.
The global equity firm's India-based economists Ridham Desai and Kuleen Tanna said in a report that the market is currently implying a long-term compounded annual return of 10.5 per cent.
However, the long-term returns need to rise to at least 14 per cent for the investors to be compensated for the risks of investing in India, they added.
Indian stock market is perceived as a high-return but high-risk market by foreign investors and the recent downslide, which was bigger than most of the other emerging markets, has further increased its overall risk profile.
The Bombay Stock Exchange's 30-share barometer Sensex added nearly 2 per cent in the month of June after losing more than 13 per cent in the previous month on the back of sluggish trends across the equity and commodity markets worldwide.
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After plunging to below 8,800 point level last month, the stock market managed to gain some ground and the barometer index (Sensex) has returned above the 10,000 point mark.However, a high level of volatility is continuing on the bourses for the past few months, which is keeping a host of investor classes away from the market that is evident from the low trading volumes recorded since early May.
Prior to the recent downslide, a sharp upward rally was witnessed on the bourses which saw the benchmark Sensex nearly doubling in about a year to an all-time high above the 12,600 point mark, driven by the country's robust economic growth outlook and impressive corporate earnings results.
While the share prices are implying strong long-term fundamentals with implied long-term EPS (Earnings Per Share) growth of 12.6 per cent and return on equity (ROE) at 17.2 per cent, the market is assigning nearly 60 per cent of the value of the MSCI India index to the future growth, Morgan Stanley said.
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However, the fundamentals embedded in the share prices might be overstated, which suggests that the valuations are less attractive than they appear to be, Desai and Tanna said.The market's price to earnings (P/E) ratio suggests that the prices are likely to decline by more than 20 per cent over the next 12 months, the report added.
Moreover, the expectations that interest rates would not rise and earnings to ROE ratio would not undergo a cyclical reversion are likely to prove optimistic assumptions, which further asserts a cautious outlook for the equity market over the next few months, the economists said.
The expectations that the US Federal Reserve would not further hike the interest rates or might at least take a pause in its monetary policy tightening measures led to a sharp jump in the benchmark Sensex on Friday last week.
The Fed has raised its benchmark rate by 25 basis points for 17th time in a row to 5.75 per cent on Thursday, but said that the future rate hike decisions would depend on the inflation and economic growth data, a statement that many market analysts deciphered as an indication towards a halt in its rate hiking spree.
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