Sensex to hit 22,000 - tactical view by BNP paribas

Sensex to hit 22,000 - tactical view
􀂃 Sensex @ 22,000 by year end - Tactical index target.
􀂃 Tactical view is based on our funds flow model.
􀂃 Fundamental India view remains Underweight.
􀂃 DXY is key - weaker DXY drives portfolio inflows and markets higher.
This note presents a short term tactical view on the Indian market as well as our
fundamental 12 month outlook. Our short term funds flow model is generating a
year end Sensex index value of 22,000. However, this is different from our
fundamental recommendations: Underweight, reasons for our fundamental caution
towards the India centre on:
1 Valuations: MSCI India it is trading on 17 times 12 month forward earnings, 1
standard deviation above the mean.
2 Earnings: the Indian Earnings Revision Index recently turned negative.
3 Domestic flows: insiders are net sellers of India, as are domestic mutual
funds.
4 Placements: USD20bn IPO’s and PSU placements are in the pipeline, with
2/3 of PSU placements likely by April 2011
The first two fundamental factors are observations as opposed to catalysts – a
market never corrected because it was expensive or rallied because it was cheap.
Insider selling can act as a catalyst, but it is clearly being overwhelmed by foreign
buying which is ignoring this contrarian indicator. IPO’s and PSU sales are an
overhang, but until they kick in the market is unlikely to react.
The Dollar trade weighted index, or DXY is a powerful driver of Asian markets in
the short-term. Its impact on India is via increased portfolio inflows. We estimate
the DXY to weaken to 73 thru year end, from 78 currently, powering another
USD6bn in portfolio flows to India.