Stock Market

Rate cut good, but stock market to react with a lag:Brokers

Given the above-average 1 year forward Sensex PE multiple of 15 times and expected 5-10 percent earnings downgrades to consensus numbers, the impact of the current round of cuts might be lower than historical patterns, feels broking firm Bank of America Merrill Lynch

Chillicious Team

Shares prices continued to climb Wednesday morning in anticipation of falling interest rates boosting the economy, but brokers feel a sustained uptrend will take time.

“The initial phase of rate cuts is not necessarily bullish for India equity markets as it may coincide with a slow growth reality check,” says broking firm UBS.

“A sustained downtrend in inflation will ultimately allow a downshift in the yield curve; that should help balance sheet repair and set the stage for a medium term recovery in growth,” says the UBS note.

The RBI Tuesday cut the benchmark repo rate by 50 basis points—twice of what the market was expecting—and said its stance would continue to remain accomodative.

At the same time, it also said that continuing policy implementation, structural reforms and corporate productivity gains will be the bigger drivers for sustainable growth.

“We do not believe corporate capex can improve with a 50 bps or a 100 bps rate cut; it will improve when the demand outlook improves,” says broking firm CLSA.

According to CLSA, weak property markets are weighing down on a potential investment cycle recovery and offsetting higher government capex. However, the broker is hopeful that the rate cut will help stabilize the property market.

Broking firm Bank of America Merrill Lynch feels expensive valuations could limit the current rally.

“History shows that the Indian market rallies sharply after 3-4 rate cuts, without waiting for growth to pick up,” says the BoA ML note.

“However, the starting point of the rally in past has always been below average valuation levels. Given the above-average 1 year forward Sensex PE multiple of 15 times and expected 5-10 percent earnings downgrades to consensus numbers, the impact of the current round of cuts might be lower than historical patterns,” the note says.