Warning bell? India may not outperform even if Fed resorts to QE3

While Nomura has has cut its Sensex target to 17,000 for the year, citing risks such as the widening current account and fiscal deficits and uncertainty over policy matters, Standard Chartered thinks Sensex is likely to be in the range of 18000-19000 in FY13.

Indian equity markets are likely to face a further downtrend if the government doesn’t hasten its policy-making decisions, market and industry experts have said over and over again. A slowdown not just globally but also in foreign investment flows means India is definitely battling the bears.

While Nomura has cut its Sensex target to 17,000 for the year, citing risks such as the widening current account, fiscal deficit and policy, Standard Chartered thinks the benchmark will likely trade in the range of 18,000-19,000 in 2012-2013. However, its main concern is that India may not outperform even if the Fed resorts to quantitative easing (QE3) in the US.

Dollar inflows from foreign institutional investors have not been robust because of apprehensions over the general anti-avoidance rule (GAAR) and concerns over rating agency Standard and Poor’s downgrading India’s sovereign rating outlook to negative from stable. “Flows have been lacklustre primarily because of the tax reasons. Till the time tax issues are sorted out, you are not going to see too much activity in the market,” Prabhat Awasthi, head of equity research and MD at Nomura Financial Advisory & Sec (India) told CNBC-TV18.

In another interview with CNBC-TV18, Rahul Singh, head of equity research, Standard Chartered Securities, warns the government will need to take executive decisions in June-July otherwise the risks of investing in Indian markets will only increase.

The only silver lining, if it can be called that, is that fourth-quarter corporate results so far have not been totally disappointing. Even though some companies have underperformed, others have pleasantly surprised investors. “On the aggregate, it has still been pretty much in line; nothing to swing the needle one way or the other for markets,” he added.

Stock specifics:

While Singh feels Reliance Industries’ fundamentals will continue to be lackluster at least for the next two years, he is bullish on LNG and GSPL among gas utilities.

Among private-sector banks, he prefers ICICI Bank , Yes Bank and Bank of Baroda . According to Singh, SBI ’s asset quality in the January-March quarter may end up surprising investors.