BNP Paribas revises Sensex target to 20,100

Clive McDonnell, Head of Equity Strategy, BNP Paribas Securities, in an interview with CNBC-TV18 said he had raised his Sensex target to 20,100 and added that he was positive on capital goods, banks and consumer goods. He further said that the Reserve Bank of India (RBI) was unlikely to raise rates anytime soon.

McDonnell said that investors were nervous about the 20% correction in the Chinese market and were also underweight on Korea, Taiwan and India.

Q: What is the region looking like given the recent turbulence in China- are investors appearing a bit nervous or do you think China will hold out?

A: Investors are definitely nervous at the moment; they are quite concerned about this 20% drop that we have seen in China. But what is lending a bit of support to the market today is the so called AH premium - that is the premium of the ‘A’ listed shares trade over their H counterparts listed in Hong Kong, that got down to about 20% today. We did see that just a touch below its long-term average and its certainly lending support to the A share market. I think investors today have taken note of that that the As are up there, they are average in terms of the premium that they normally trade over H, I think that is lending a bit of strength to the other China market today.

Q: Is this increase in volatility indicating anything about risk appetite though, is money starting to pullback?

A: I think the source of the pick in volatility goes back to the dollar and we have seen a little bit of dollar strength come through. Certainly looking at the DXY (Dollar Index) - it has come off its lows that we saw about two weeks ago and that in turn has led investors to wonder if they should be reducing a little bit of beta in portfolios and as a result we are seeing a bit of pick up in volatility but it all depends on where do you think the dollar is going from here.

At BNP we think the dollar is in a phase of structural decline and hence we would see that the weakness in equity markets as being a buying opportunity because we think incrementally the dollar is likely to resume its downward trend that helping in term of flow of funds into Asia including India and that over time will bringing down the volatility in markets. A: Certainly would be not just for India but for other markets that we like such as Korea-Taiwan, we would be a buyer on weakness because we think in terms of the most strategy long-term money there isn’t mentality out there of buying on dips; mainly because of the big underweight investors have in three of the four key markets in Asia.

As we look at investors waiting for Korea, Taiwan and India compared to their benchmark, they are still quite significantly underweight, ofcourse China they continue to be overweight. But those three important markets they remain underweight position so hence we that there mentality is definitely trying to lift exposure on any weakness in those three key markets.
Q: Do you have reason to scale down your 12 month Sensex target from the earlier level of 20,000 odd that you had?A; Actually that represents quite a significant upgrade from where we were previously, so we have raised our index targets yesterday across the board not just in India and we are now looking at 20,000 on the Sensex. I think it’s important to keep in mind what the implied valuation level of that is. On a price to book basis you are looking at about 3 times for the Sensex at our target; market currently trading probably by 2.6 times their price to book. Certainly a punchy number for India but it does go back to a point that we see a further dollar weakness ahead, that leading to an increase in investor risk appetite and given the improved investment climate in India we think India will be able to continue to attract foreign capital in combination with good earnings numbers. Comparison to other countries around the region India and China stand out. Both will come through this global recession with surprising resilience in the EPS numbers. Yes, they have dipped but not as bad as what we are seeing in some of the more cyclical markets like Korea- Taiwan.

Q: So if indeed in the next 12 months if Sensex is to go to 20,000 which would entail a return of 30% plus – what in the index do you think will carry it- what are your biggest over weights?A: Our biggest over weight center on the capital goods space the banks and also the consumer related plays. We think with growth likely to surprise on the upside the banks are the best way to play that in our mind going forward. We don’t see a lot of risk of upside to interest rates. We see similar to most economies across the globe, no negative output gap in place in India. Notwithstanding short-term volatility in prices associated with weaker monsoon. We don’t see RBI rushing to raise rates anytime soon and we think that should be supported with the bank sector helped by the trend of resilience in the consumer.

Q: When you say infrastructure would you include power stories in that as well be it pure power plays or power equipment makers?A: I think the focus would more be on the power equipment makers not just in India but also in China and in Japan and the view being that you are seeing a lot of postponement of investment and I think there is lot of potential given the improved access to liquidity that we are seeing globally for some of those projects to be restarted. If you look at from a valuation point of view, it is the power equipment providers or basically the capital good providers that have lagged a bit in the rally so far.