BofA-ML retains December Sensex target at 33,000

American brokerage Bank of America-Merrill Lynch (BofA-ML) on Monday retained its Sensex target at 33,000 by December, but said in the medium term, the Dalal Street will see more volatility.

"We continue to maintain our December Sensex target of 33,000 points. But in the near-term, the markets will remain subdued and range bound with a negative bias, as quarterly earnings are low and more earnings downgrades are likely over the medium term," BofA-ML Analyst Jyotivardhan Jaipuria said in note.

"Also, the India versus GEM premium is near all-time at 35 per cent the GE averages," Jaipuria said.

The markets are likely to witness another quarter of weak growth in the ongoing earnings season. Mirroring the previous quarter when aggregate Sensex profit fell 1 per cent year-on, profit growth is once again going to be subdued at 1 per cent, he said, adding he sees more earnings downgrades for the next few months before stabilising and earnings upgrades may not start until next year.

On a top-down basis, we expect 2015-16 consensus growth estimates of 18 per cent to get downgraded to 12-13 per cent growth, he added.

However, he noted that FIIs have the all-time high overweight on the domestic market. This is on the back of nine consecutive quarters of positive FII inflows. Strong FII inflows have resulted in all-time high foreign ownership for the markets at about 28 per cent.

While GEM funds have a 12.8 per cent weight on the country against the index weight of 7.7 per cent, which is a massive 510 bps OW.

Noting that the Sensex has rich valuations, he said post-2014 polls, the markets re-rated and have been trading at 16 times one-year forward PE. And despite the recent bloodbath, the valuations are still a 10 per cent premium to long term averages. Also, in the GEM context it is currently at a 35 per cent premium to GEM, he said.

On the Modi government's first year reforms report card, Jaipuria said slow and steady reforms were anticipated and the reported loss of faith in the Modi regime to accelerate reforms is partly due to unrealistic expectations.

"Returns last year were led by re-rating, but returns this year would be led by earnings. With earnings being sluggish, the markets would give a flat to slightly negative return for the majority part of the year and the YTD return has been negative 1.5 per cent.

"We see earnings improving only late 2015 and the market returns being back-ended with a flat to slightly phase in Q2 and Q3 of 2015," Jaipuria noted.

He attributed three reasons for the present investor jittery-sluggish recovery, the MAT controversy and delay in getting the new land law in place.

The economy continues to be sluggish and earnings growth in the December quarter was the weakest in 20 quarters and the current quarter is unlikely to be different, he said, adding the dispute on MAT has reignited fears of harsh taxation rules.

On the new land law, he said this underlines difficulty in reform legislation. Investors have been keenly watching the progress of the new Land Acquisition Bill and are hoping the government can quickly pass the Bill through a joint session of Parliament.

He also warned that investors could be disappointed if the Land Acquisition Bill and the GST Bill are not passed in the Budget session, Jaipuria said, adding the chances of these Bills getting House nod look distant.