In our last Market Outlook report
dated August 02, 2006, we had said that going ahead there would be
two key positive triggers for the Indian equity market, viz a
pause in the rate hikes by the US Federal Reserve (Fed) and
better-than-expected earnings for Q1FY2007.
The two triggers have played out
as per our expectations and at the current level of 12,404 the
Sensex has swiftly discounted both these positives, leaving very
marginal upside.
The Fed futures are indicating
that any rate cut by the Fed can come in the first quarter of
CY2007 at the earliest. This leaves us exposed to global economic
risks in the interim six months.
Corporate earnings haven't seen
any significant upgrades over the last few months. Any upside from
hereon would depend on the upgrades in the index' earnings driven
by the better-than-expected Q2FY2007 earnings, especially in the
banking and oil sectors.
However, upgrades in the Sensex'
earnings will have to be significant—in the range of 10%—to bring
the market's valuations back to attractive levels. The Sensex is
currently trading at 16.1x its one-year forward earnings, which is
towards the higher end of the band in which it has usually traded,
ie 12-16x.
We continue to prefer domestic
demand-driven stories like automobiles, banking, capital goods and
cement.
