Will the Sensex climb to the magical 40,000-mark in 2019?

French investment bank BNP Paribas said India’s earnings growth potential is around 14-15 per cent.
Samie Modak reports from Mumbai.

Illustration: Dominic Xavier/Rediff.com

BNP Paribas expects the benchmark Sensex to climb to 40,000 next year, implying a 10 per cent upside from the current levels.

The French investment bank, however, has a neutral stance on the country’s markets as the “earnings environment, unlike the macro-economy, hasn’t revived yet.”

China, South Korea, Indonesia and Thailand are the Asian markets that BNP Paribas is overweight on. However, it has an underweight stance on Taiwan, Malaysia as well as the Philippines.

“The reason we are not underweight on India is the ease of stock selection. India still offers a wide range of good quality stocks across sectors, consistently generating free cash and excess return,” said Manishi Raychaudhuri, Asia ex-Japan equity strategy at BNP Paribas Securities.

The brokerage feels India’s price-to-book value (P/BV) is expensive compared to Asian peers.

“India’s valuations also leave little room for error. Sensex P/BV multiples are in line with the long-term average, but didn’t fall with the decline in return on equity (ROE) over the past six years.

"So, it would be unrealistic to expect a rerating as ROE recovers. Relative to the average of Asia (ex-Japan), India’s P/BV is almost one standard deviation higher than the long-term mean,” said Raychaudhuri in the note.

“What further complicates India’s earnings picture is a significant overestimate of the market’s earnings growth in 2019 and 2020.

"We believe India’s earnings growth potential is around 14-15 per cent, slightly higher than the nominal GDP growth, not 18-21 per cent as the current consensus seems to suggest,” the note added.

The brokerage said a drop in oil prices eased concerns of a widening current account and weak rupee. However, it advises against complacency.

“Given the unpredictability surrounding the oil price and its geopolitics-driven nature, complacence on this issue would be premature,” Raychaudhuri added.

Despite slowdown concerns, BNP Paribas is most bullish on China due to “potential growth stabilising government policies, cheap valuations and availability of a large stock universe."