Sensex may fall as much as 20% in next few months: Poll by ET

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The sudden gush of foreign investor money into domestic stocks may not last long, an ET poll of top fund managers reveals. Jittery investors worried over shaky corporate earnings, uncertainty over government economic policies, and headwinds blowing from the revival of the Euro zone debt crisis could push the Sensex down as much as 20% in the next few months.

The Sensex, the poll shows, could fall to 13,000 in a few months, with eight fund managers predicting it to range between 13,000 and 15,000 by March 31. Most, however, expect it to rise to 20,000 by the year-end as falling interest rates buoy sentiment and spur increased consumption and investment by corporates.

"We're still very cautious with our investments in equities market. Markets will only stabilise once there is clarity on macroeconomic issues like growth, inflation, interest rates and deficit," said Prashant Sharma, head of investments at Max New York Life Insurance.

The Sensex was battered for much of 2011 as inflation forced the central bank to increase rates 13 times in a row, crimping corporate profitability and investment. The government also failed to enact key policies to revive sentiment and signal its seriousness in increasing the tempo of economic growth.

In November, it was forced into a humiliating reversal of its key initiative allowing foreign retail giants such as Walmart, Carrefour to set up shop in India, due to stiff political pressure.

The markets were expected to be dull in 2012, but a sudden pick-up in foreign fund flows has pushed the Sensex above the psychologically crucial 16,000-mark, surprising investors.

"It's too early to form a definitive opinion; for all you know, it could just be short covering. We're maintaining a cautious view in the short term, with state elections round the corner followed by the Union Budget," said Mahesh Patil, chief investment officer of Birla Sun Life Asset Management.

Foreign investors have bought stocks worth $472 million ( 2,500 crore) since the beginning of the year compared with net sales of $385 million for the whole of 2011.

Some fund managers are also attaching a lot of importance to the elections in Uttar Pradesh. A strong performance by the Congress is expected to bolster its chances of pushing through unpopular but important policies.

"If the Congress party puts up a decent show partnering with a strong ally like Samajwadi Party, it will be extremely positive for the markets," said Ramanathan K, chief investment officer of ING Investment Management.


But Edelweiss analysts said in a note to clients:"Repeated election gains for the Congress, despite allegations of misgovernance, may not necessarily be positive for the economy as the party might feel emboldened to pursue its social sector agenda (as it is paying rich political dividends), thereby hindering the fiscal consolidation process."

The markets' worst nightmare, however, may not be either UP or the government's worsening fiscal math but a sudden catastrophic break-up of the European Union.