Ambit splashes more red ink, talks 14,500 for Sensex

The shadow of economic uncertainty in the US is getting longer. Ask Ambit Capital, which says the Sensex is likely to slide to 14,500 in view of the crisis, which may linger for a few more years. Ambit gives two broad reasons for the downgrade. First, Indian markets and investments have been historically linked to the performance of the US economy, and second, Indian markets are still expensive compared to its emerging market peers.

Looking at the first point, India’s demand for investment has moved on a parallel track to the growth of the US economy. The connect has been particularly strong since 2008. The correlation extends to equity markets as well. During October 2007 to February 2009, the developed markets fell 56 percent, Indian markets tumbled 58 percent while emerging markets were down 63 percent. The drop since May 2011 to July this year has been a uniform 6 percent for all three categories. This link confirms that India cannot be insulated from what is happening globally.

Coming to the second argument, the Sensex is trading at a 40 percent premium to the emerging markets pack based on earnings estimates for the next year as against an average of 25 percent from 2006 to 2011. Now add to this the weak corporate earnings, slowing investments, no breakthrough in policies. The Ambit report says, “It is unlikely that FIIs (foreign institutional investors) will turn into buyers of India until India’s premium de-rates to its long-term average.” So, its estimate for earnings per share (EPS) is Rs 1,159 and Sensex targets have been cut to 14,500. As early as February 2011, Ambit had published a report, saying the Sensex is moving towards 16,000. Now with the index touching the level, it has revised its EPS forecasts.

On August 18, Morgan Stanley had also slashed its Sensex target by 15 percent and set it at 18,850 for December 2011. According to a Mint report , CJ George, Chairman and Managing Director, Geojit BNP Paribas Financial Services, also thinks the markets can go down another 10 percent. Citigroup has also been cutting its year-end target by 10 percent to 19,700.

But Ambit’s target of 14,500 seems to be the lowest as of now. Saurabh Mukherjea, head of equities, Ambit Capital, told CNBC TV 18, that he is most cautious about banks and IT. He expects all banks, from the State Bank of India to mid-cap ones, to go down from here and there will be heavy earnings downgrades in bank earnings from now. The Bankex has been the worst performer in this Sensex fall, losing 7.5 percent even last weak. His stance on banks finds support in a Bank of America Merrill Lynch report today, which says many banks could face further downside of 20-30 percent from these levels. However, Citi group is still bullish on banks and auto.

Watch video: Saurabh Mukherjea, Head of Equities, Ambit Capital is very bearish on Indian market