The Hindu Business Line : Foreign broking firms turn bearish

FOREIGN broking firms have suddenly turned pessimistic on Indian equity market and changed their outlook particularly on sectors such as banking, power and energy.

Their fear is that the new Government with Left parties support will go slow on reforms initiated by National Democratic Alliance (NDA) Government.

Foreign broking firm Smith Barney, a Citigroup company, said: "From the market's perspective, the worst-case scenario has come true, a change in Government with attendant policy uncertainties. We are changing our view on Indian market and turning cautious." The firm has cut the target for BSE's sensex from 6,600 to 5,800.

The biggest concern among the brokers is privatisation and reforms in the banking sector. On Friday, PSU and banking sectors stocks were the worst affected on the bourses.

Most of the FIIs' investment decisions are based on the advice from the foreign broking firms. Some of the big foreign broking firms in India catering to FIIs are CLSA, Smith Barney, DSP Merill Lynch, UBS, JP Morgan, JM Morgan Stanley.

CLSA, a leading foreign broking firm said: "The verdict has, however, brought in a risk of discontinuity in policy on key economic measures and reform initiatives, especially with Left parties being a major source of support to the Government."

It said the near-term uncertainty on economic policy would keep markets range-bound and stocks in sectors like power, telecom, capital goods, banks, oil & gas — that have rallied on expectations of policy initiatives were most likely to under perform in the near term.

UBS Securities, Singapore, an affiliate of UBS AG, feels that against this background, the scope for populist policies had increased and some of the pending but contentious reforms were unlikely to be implemented.

"At the same time, we also believe many of the reforms initiated by the BJP Government including privatisation are likely to proceed albeit at a slower pace".

Other than the privatisation, reforms in the banking sector could also been affected, feels the foreign broking firm.

"Reduction of Government ownership in banks, increase in foreign limits in state-owned banks, promoting consolidation in the banking sector and higher FDI limits in financial services (especially insurance) could all be on the back burner," said Smith Barney.

There are also concerns over hike in tax rates on corporate and individuals in higher income segment.

"For the Government to adopt a softer stance on subsidies and hold back on privatisation (of profit-making PSUs), it will need to raise revenues through higher taxes - which raises the risk of increase in tax for corporates as well as personal income tax for the higher income taxpayers," said CLSA.

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