Buy equities when analysts are bearish, sell when they are bullish
Brokerages are in a rush to downgrade Sensex and Nifty earnings growth and lower 2011 year end targets for the indices. Earnings growth for Sensex and Nifty companies has been reduced by 1.5% to 2% for fiscal 2011-12. Sensex and Nifty year targets have been reduced by 10% to 15% by analysts. All these downgrades have happened in the last four months, when all hell broke looses. RBI raised benchmark repo rate by 125bps in the last four months even as inflation climbed from 8.3% to 9.3%. Global issues of emerging market inflation and developed market debt came into the fore in the April-August 2011 period. It just did not make sense for analysts to stick to their forecasts made when all things were going along well and the downgrades started happening in a rush.
Analysts have not been clairvoyant in lowering their forecasts, the markets have made them to reduce forecasts. For example an analysts with a Sensex target of 20,000 for calendar year end 2011, will have to think many times before retaining the target as the Sensex is at 16,500 levels now and it will have to move up by over 20% in four months time to reach the target. It makes better sense to lower targets now. Lowering targets hurts investor sentiments as fund managers and other institutional investors look to maintain higher levels of cash or become more defensive in their investments in equities. This depresses indices further and provides great buying opportunity for forward looking investors.
Investors have to ask themselves, why analysts were bullish on the markets just six months back and have turned around completely now? The issue of inflation in India and other emerging markets was raising its head one year back, but policy makers and analysts failed to judge the true nature of the inflation. As a result, when inflation hit the economies, it hit them hard. India, China, Brazil, Korea are all facing multi year inflation highs. The issues of sovereign debt came into play one year back, when Greece default talks came up. Again analysts ignored the true nature of the debt and continued on their positive forecasts. Debt issues have played havoc on markets recently with equity markets falling by over 10% across the globe.
The same is true with analyst forecasts pre 2008 crisis and post 200 crisis. Pre 2008, analyst called for a continued bull run of the markets which saw domestic indices moving up by three times in the 2005-2008 period. The burst of the credit bubble forced them to call for a bear run on the indices. Analysts typically react to what other analysts are doing and what the market is doing. Hence the failure to forecast potential downsides and upsides.
Analysts should actually be focusing on what is going to happen down the line and not what has happened in the past. Looking ahead, there are expectations that inflation will come off in India and other emerging markets. The policy actions of central banks in emerging markets coupled with governments in inflation driven countries tightening their belts are positive factors in inflation coming off. In the developed world, debt issues are forcing a cut in government expenditure and this is positive for the debt ridden countries in the longer term. The US fiscal deficit is actually forecast to come off post 2012 on cuts in government spending. Countries with high debts will see growth coming off in the near future and that growth coming off is largely factored in equity prices. Global markets have not performed for the last three years with all the global indices trading in negative territory from highs seen in late 2007.
Economies are not in a strong footing at the present, but they are forced into policies that will make then stronger down the line. There are analysts who have called bubbles and depressions at the right time but they are few and far between and usually warnings from such analysts are ignored by most, as it does not suit investors to hear such warnings. Investors should always listen to what can go wrong in analyst’s forecasts than listening to the forecast itself.
This is a time to listen to what can go wrong with downgrading markets at present.