WHAT IS IN STORE FOR INDIAN STOCK MARKET ?

Geo-political tensions in Syria have led to a spike in oil and gold prices compounding India’s weak rupee (down 8.6% this week). While we think this will be short-lived, in this report, we look at a stress case scenario for India.

So where can the market go now on a worst case? The market is trading slightly below the long term average forward PE of 14.1x. However, at its low, the market tends to go to 10x whenever there is a global crisis. Given that the developed world is recovering, we are assuming current valuations for the export companies and 1SD below mean for the rest of the universe. Based on this we get a stress case index level of 16,000 for the Sensex.

Equity investors have not yet panicked in India: One key risk for markets is that FII holding at 21% (45% of free float) is close to all time highs. India remains vulnerable to any GEM sell-off.

History tells us to be wary of sharp recovery: Looking at past instances of sharp rupee depreciation of over 15%, the market has fallen in all the 3 instances on an average 21.5% (ranging from 4.5% to 47%)

Interestingly, markets recovered practically the entire loss 3 months later on all the 3 occasions. Markets will stop panicking when policy makers start panicking: Any policy measures to shore up the rupee by say quasi sovereign bonds/NRI bonds is the key and could lead to a spike in the rupee and help markets.

What about other macro variables?

Currency:  THE likely scenario is that the rupee stabilizes in the Rs63-69 band due to likely policy action. However, any hike in rates could see the rupee at Rs75/US$ by year-end.

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 Growth: We continue to expect downgrades to GDP and earnings growth. In a stress case scenario, we could see GDP growth at 4% (vs current 4.8%) and earnings growth at 0% (vs current 7-8%).

 Bank NPLs: In a stress case, we could see Delinquency levels rising to ~4% from 2.8% and gross NPL’s rising to 5.8% v/s 3.4