Sensex Forecast: Right the first time, wrong the second

Forecasting the Sensex is never easy, but it can get positively frustrating if you got it right the first time, but later changed your mind.

And that’s precisely what leading brokerages did in their forecasts for 2013. They started out on a bullish note, predicting that the Sensex would close the year at 20,000 to 21,000 with the economy’s ‘green shoots’ thriving and corporate profits accelerating through the year.

But by July, Indian economy went downhill, with the US Fed threatening to shut the taps of liquidity and the rupee hitting a life-time low of 68.7 to a dollar. Corporate profits duly plummeted. As things turned bleak, brokerages hastily scaled back their Sensex targets. They were completely caught by surprise when sentiment reversed and the markets zipped back to 21,000 by year-end.

Morgan Stanley flagged off the year with a rosy prediction, citing an improving ‘earnings cycle’ to set its Sensex target at a precise 23,069 for December-end. But with corporate profits languishing in the first two quarters, the firm revised its opinion.

In the first week of September, citing weak earnings and slow recovery, it trimmed its Sensex target to 18,300. That’s way off the mark now, with the Sensex actually closer to the original forecast.

BNP Paribas Securities had likewise floated a Sensex target of 21,300 for the year, predicting a 9 per cent increase from 2012. But when the going got tough in the June-September quarter, it lowered its projection to 17,000. Within days, Raghuram Rajan had taken over as the new RBI Governor, the rupee had reversed and the markets were on an upswing.

Had it stayed with it, Bank of America-Merrill Lynch’s January prediction would have been bang on target, given its Sensex forecast of 21,750 for the year. But this firm, too, turned gloomy in September, pegging down the target to 16,000 by 2014.

Citibank erred on the side of caution, estimating that the Sensex would only breach the 20,800-mark during the year. But when things got rough, it joined the crowd in further cutting this target to 18,900 in August.

Brokerages notched up low scores in their sector calls though.

BNP Paribas started the year being overweight on auto, engineering and IT and underweight on metals and energy. While the call on IT proved to be accurate, with the BSE IT index shooting up by 52 per cent during the year, its strategy of going overweight on capital goods and energy did not pan out, with the indices losing value.

BoFA-ML bet on rate-sensitive sectors such as auto, financials and real estate along with telecom and pharmaceuticals. Pharmaceutical stocks rose 17 per cent in 2013, but with interest rates heading north, the banking index crashed by 10 per cent and real estate stocks tanked by 37 per cent.

In contrast, Citi was overweight on the financials, consumer discretionary, capital goods, IT and telecom sectors, while it was underweight on consumer staples, energy, utilities and materials. The firm was neutral on pharma and real estate. The FMCG index rose 7.2 per cent on the BSE in 2013, while the BSE-capital goods index fell 9.4 per cent.

Of late, brokers have been citing the Modi factor to turn ‘cautiously optimistic’ on the markets for 2014. They are yet to make their forecasts for the year. But with the elections coming up mid-year, this is likely to be an even more difficult year for crystal-ball gazing than 2013.

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