UBS - Sensex - target 22,600 in 2008

Foreign brokerage UBS has raised its end-2008 target for the BSE Sensex from 19,000 to 22,600 saying economic growth, which is insulated from the global slowdown, will help companies report strong numbers.

In its India - Outlook 2008 report released here today, UBS said it has factored in higher valuations in an environment it believes will be characterised by both sustainable lower cost of capital and lower domestic political risk.

Putting aside investor concerns on excessive valuations due to the strong performance of the Indian markets in 2007, Manishi Raychaudhury of UBS's India Equity Research team said: "While a global economic slowdown and credit market dislocation could adversely affect Asian markets, the domestically-driven Indian market is relatively insulated."

The Sensex has surged nearly 42% from 13,942.2 to 19,795.87 today during this calendar year making several market watchers advice caution.
Says Raamdeo Agrawal, managing director, Motilal Oswal Securities: "There is all-round optimism across sectors, but this is built into the stock prices. Finding value at current prices is a difficult task."

Raychaudhuri sees a continuation of a strong investment cycle in infrastructure and industrial capex, the peaking of banks' lending and deposit rates - although he concedes that the central bank may not signal a peak in the cycle in the near term, and continued positive surprises in earnings and stable earnings growth as the key themes driving the market in 2008.

"Despite a mean reversion in earnings growth to between 20-22%, from between 30-35% in the last three years, price/earnings ratios of around 20 times are likely to be supported by earnings surprises from domestically-driven and interest rate-sensitive sectors as well as by a continuation of benign liquidity in the stock market," he added.

The UBS report noted that the market movement in 2007 has been narrow - driven by a small number of large stocks causing the valuation of frontline stocks in several sectors to appear steep. "We expect investors to rotate into less expensive sectors such as autos and metals as well as into cheaper stocks in those sectors that have outperformed," said Raychaudhuri.

On the downside, the report warns of the potential for an unexpected rise in inflation (possibly from global prices rising to a level that forces an upward adjustment in the cost of fuel domestically), and growth deceleration. In addition, increasing differences of opinion between the United Progressive Alliance and the Left parties has the potential to increase political uncertainty domestically and lead to an early general election though such concerns have receded recently.