Poor GDP growth can drag Sensex to 14,500-level

Amid concerns over a slowdown in economic expansion, a research report has said that a fall in the growth rate to 7 per cent could drag the stock market benchmark Sensex to as low as 14,500 points by next fiscal.

The report by global financial services giant Deutsche Bank, however, asserted that the long-term growth prospects of the Indian economy remained intact and an average growth rate of 8 per cent was expected in the next two years.

But, factors like weakness in the investor expectations for the country's economic expansion and corporate earnings growth could nudge the investment community into a cautious posture.

Seeking to evaluate the impact of any slowdown in economic growth rate on the stock market, Deutsche Bank said that a fall in GDP growth rate to 7 per cent in the next fiscal (FY2012-13) would result in a corresponding fair value range of 14,500-16000 for the BSE Sensex.

The Sensex is currently trading near 17,500-point level and has not slipped below 15,000 points for more than two years, or since August 2009.

The index had traded over 21,000-points in November 2010, but has been sluggish for past few months and touched its 52-week low of 15,745.43 points about a month ago on October 4.

The country's economic growth has averaged 8.4 per cent over the past five years. Barring the global financial crisis period of 2008-2009, the average growth rate for past five years has been 9 per cent.

Deutsche Bank said that India's position as one of the most rewarding market across the world in the past five years could see some value-erosion in the event of slower GDP growth and declining corporate earnings growth rates.

"Over the past few months we have seen a 260 basis points compression in India's PE (price-to-earnings) valuation, driven by rising risk aversion (due to global factors) and worries over policy uncertainties," it added.

The market has witnessed heavy volatility in recent past and the Sensex has registered a dip of over 14 per cent so far this year and has fallen by about 17 per cent from its 52-week high of 21,108.64 points scaled on November 5, 2010.

Deutsche Bank said that the risks were growing for a slowdown in the country's medium-term economic growth trajectory towards 7 per cent, due to concerns over policy uncertainties, conflicting demands and compulsions of a popular democracy and India Inc's growing despondency.

However, these risks would decline considerably if global commodity prices cool down and policy actions are undertaken for addressing supply-side bottlenecks in coal, preventing any runaway increase in fiscal deficit and there was an improvement in India Inc's business confidence and inclination to invest.