Prospects for Indian stocks, already clobbered by high interest rates, just got bleaker with pundits forecasting the Sensex to plunge to 15,000 after credit rating agency S&P downgraded the US rating.
Recession 2011: Sensex may dive to 15k, fears market, says ET poll of fund managers
MUMBAI/KOLKATA: Prospects for Indian stocks, already clobbered by high interest rates, just got bleaker with pundits forecasting the Sensex to plunge to 15,000 after credit rating agency S&P downgraded the US rating.
The benchmark could fall 13% in a few weeks in a possible 'knee jerk' reaction to S&P's decision, an ET poll of fund managers and equity strategists said. But it may recover to end the calendar close to the 20,000 mark as the main drag on India's performance, commodity prices, may weaken in a global selloff. Of the 12 fund managers and equity strategists polled by ET, nine said the Sensex could fall to 15,000.
Optimistic About Rebound
But all of them were optimistic about a rebound. Four said the index could close around 17,000 by December. Five forecast it to be between 18,000 and 20,000, and the rest saw it at around 21,000. This optimism is a reversal of investor mood from mid-June when year-end forecast for the Sensex was 15,000.
"As a knee-jerk, there could be some selloff in Indian equities and bond markets," said Vikram Kotak, chief investment officer at Birla Sun Life.
"I think the knee-jerk cannot remain for long because India will benefit from the long-term fund flow with the downgrade. India is still growing faster than the West." The S&P downgrade, though anticipated for months now, could still roil the market as investors adjust their portfolios since the US dollar and treasury bills will lose their safe haven status.
Borrowing costs in the global financial system could climb, puncturing a fragile recovery from the 2008 credit crisis. Demand for products from emerging economies such as India and China may fall, weakening these countries too. The worsening crisis in Europe will add fuel to the selloff fire.
"The risk aversion we are seeing will now result in people taking risk off the table," said Dixit Joshi, managing director and co-head, equities, Asia, Deutsche Bank. "India will be impacted as a consequence of this," he said. Burdened with a series of rate increases, which have eaten into profits of corporate and is slowing consumer demand, India is the worst-performing major market in Asia this year.
But the valuations still remain higher than emerging peers such as China and Brazil. India's benchmark indices fell over 5% last week, eroding Rs 2.64 lakh crore in market valuation on the National Stock Exchange.
Crude oil, copper and other commodities also slid last week over widespread fears that the US may slip back into recession with falling consumer confidence and cut in government spending as part of a compromise to raise the country's debt ceiling. Investors are baffled at the unfolding events that are turning previously accepted definitions on their head. US treasuries are no longer considered as safe and the greenback may not be the most sought after currency.
"In a funny way, what is very pessimistic news is turning out to be optimistic that commodity prices will drop," said Samiran Chakraborty at Standard Chartered Bank.
"As far as global inflationary pressures are concerned, we would be relatively in a comfort zone in terms of being able to stop rising rates. I guess we have to give it time to play out. We are not sure if commodity prices will react negatively to this. I am more concerned about how the growth numbers are panning out, rather than this rating downgrade."