2006 Outlook – Safety First, As BUBBLE Arrives!
End-2006E Sensex fair value remains 8500, 25% below current level. Recent earning upgrades (positive) negated by rise in interest rates (negative) on our market valuation models
1. Remain defensive; position for market cool off – although not as highly valued as earlier peaks, the Indian market now appears to be in a bubble zone. Flows of recent scale are hard to sustain
2. Tightening banking sector liquidity – a key fundamental concern Central bank interventions are now needed to avoid tightening liquidity and rising rates becoming detrimental to growth Local flows join the party
The Indian market’s near one-way 23% run up in the first 3 months of 2006 has been characterized by continued big FII inflows and resurgence in flows into domestic equity funds.
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