Global concerns, tepid domestic capital expenditure and lacklustre earnings are some of the headwinds Indian markets could face in the short-term, say foreign institutions. High inflation and possible hard landing in China could add further pressure, they added.

According to Morgan Stanley, growth is slowing due to high inflation and global headwinds. This along with tepid domestic capex and negative earnings revisions will cap equity upside.

For Citi, India is the most “unattractive” market among Asia-Pacific peers.

According to BNP Paribas, there have been earnings downgrades in India and that could get aggravated with the global problems. Also, the FY-12 Q2 and Q3 results could be muted due to the lag effect of the monetary tightening by the RBI and higher base of last year.

“We recommend investors to maintain status quo and not sell in market panic,” said BNP Paribas.

A Credit Suisse report dated September 5, said: “We continue to believe that the period of uncertainty is ahead of us. The problems of sovereign debt in Europe, potential recessions in the US/EU, a possible hard landing in China, and continuing high inflation and slowing growth in India are yet unsolved. It is unwise therefore to aggressively add risk to the portfolio or to drastically change portfolio weights. Yet, sharp price movements provide opportunities to both buy and sell stocks.”

Not all that bad

However, Bofa-ML is not painting all that bad a scenario for Indian equities. “Our current Sensex earnings estimates imply an average compounded growth of 17 per cent over FY 11-13. In our downside scenario, the average growth falls to 8 per cent. By way of comparison, growth during FY 07-09 (Lehman crisis) was close to zero per cent,” said a note from Bank of America Merrill Lynch. “We are, of course, expecting the current slowdown to be more benign than during the Lehman crisis,” BofA-ML added.

FII flows to dictate

“Earnings have support from decade-low gross margins and strong balance sheets. We think broad market earnings growth may have troughed. RoE is off lows and bears upside risk given balance sheet discipline,” the Morgan Stanley report added.

Several of them were of the opinion that FII flows would dictate short-term direction of the market.

According to UBS, “FII inflows into Indian stocks are not typically followed by outflows, the only exception being the global financial crisis in 2008. In the absence of severe FII outflows, Indian markets should find support at current levels. However, if we see significant FII outflows, we believe Nifty/Sensex could correct further by 15 per cent – 20 per cent on our bear case scenario.”

BofA-ML report added that equity returns are over-dependent on foreign flows and that the current account deficit is a problem.

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