Sensex to hit 14,500 in first half of 2012, recover to 19,000 later

Bank of America Merrill Lynch sees benchmark index Sensex falling to 14,500 in the first half of 2012 and recovering to 19,000 by the year-end. It advises investors to buy Indian equities below 15,000 and sell above 18,000. The likely fall in equities is because of a variety of reasons, including falling growth, worsening domestic macro fundamentals, deteriorating earnings profile and slowing global economy.

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"Nonetheless, we see the likely fall in equity prices as a 'big' trading opportunity," it said. The recovery in the second half would be triggered by the Reserve Bank of India's rate cuts and the government taking decisions to kick-start investment spend. The research house expects earnings per share of Sensex to be downgraded to 1,200 from 1,275 mainly due to falling sales and rising costs.

The bank is positive on defensive sectors such as pharmaceuticals and staples, despite expensive valuations, and remains overweight on private sector banks and auto stocks among the interest rate-sensitive sectors.

On December 30, 2011, Sensex posted its first annual fall in three years as a combination of near double-digit inflation, high interest rates, slowing domestic growth and policy inaction turned off investors already shaken by global headwinds.

The benchmark shed 24.6% in 2011 to be the world's worst-performing major equity market and the outlook for next year remains bleak, although cheaper valuations and a possible cooling off in inflation that would allow the central bank to reverse its monetary tightening cycle raise some hopes.

Foreign fund inflows, a major driver of Indian stocks, dried up in the dismal year with net outflows of about $380 million as of Wednesday, a far cry from record inflows of more than $29 billion in 2010 that had powered a 17% rise in the benchmark index, following an 81% surge in 2009.

The benchmark's fall in 2011 was only the second annual decline in a decade. The Sensex ended down 0.57% at 15,454.92 on Friday. The wider 50-share NSE Nifty index fell 0.47% on the year. HUL and ITC were the best performers in the Nifty, rising about 30% and 15%, respectively.