What makes India a risky investment destination? | Outlook Business
Home  /  Perspective  / What makes India a risky investment destination? | AUG 31 , 2015

Soumik Kar

Perspective

What makes India a risky investment destination?
Why Ambit Capital thinks the Sensex could drop as low as 22,000

In its latest strategy note titled “Exit the fantasy, enter the reality”, Ambit Capital has not only further cut its Sensex estimate for FY16, it also has revised down the GDP growth estimates from 7% to 6.8%. More alarmingly, the note opines that there is a high risk of the Sensex dropping to as low as 22%. That is a 15% downside from the current level of 26,000.

Psychologically if the Sensex does drop to 22,000 it would have given up all the gains that it notched up after the recent NDA government was sworn in. Essentially, the euphoric gains that came in post that surge of feel-good would have evaporated. The institutional brokerage headed by Saurabh Mukherjea states, “ With a high likelihood of the Chinese central bank embarking on a continued devaluation of the Yuan, the Indian stock market stands exposed to: (a) Indian products losing their competitiveness to their Chinese counterparts; and (b) rising risks to India’s $0.5tn of foreign currency debt. Such a scenario could be a catalyst for more pullbacks in the Sensex with the trailing P/E multiple likely to drop to 14x (as seen in the Lehman crises), implying a Sensex level of 22,000.”

Another reason that Ambit feels that the current market level is unsustainable is because of the disconnect between retail flows into the market and corporate performance. Retail investors are usually late to the party and this time, too, they seem to be in no danger of losing that reputation.

 

Rising retail inflows despite waning corporate performance

The brokerage says, “ Even though the Indian equity market has seen significant inflows (especially from retail investors), this confidence appears to be misplaced in light of the underlying performance exhibited by corporate India. The initial phase of the current market upmove that began in September 2013 was accompanied by an uptick in revenues and earnings growth; however, this trend has reversed for the worse in the last three quarters. The last time corporate India had such a poor performance in terms of revenue and profit growth was during the 2008 financial crisis, the year that had seen the Sensex drop by more than half of its peak.”

The report further adds, “Today, however, in spite of such an abysmal performance, Indian equities have remained afloat, helped by retail investor optimism. In contrast, over the past six months, FII equity flows into India have dried up (average monthly outflows of ₹20 billion from FIIs versus average monthly inflows of ₹60 billion from MFs over the last six months).” So, is there that retail investors know that well-networked institutional investors are unaware of? As much as one would hope, that seems highly unlikely.

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