MUMBAI: Last week Nifty ended positive at 2720 levels gained 3.78 per cent and Sensex ended the week up by 5.17 per cent at 8750 levels. Experts are of the view that the bullishness in markets will continue for a short term.

While India is witnessing a slowdown in GDP growth, in line with the global slowdown, it is still one of the fastest-rising economies in the world today. However, there are five potential risks for the Indian stock markets.

“The decline in corporate profits could be in excess of the currently factored 18-20% due to numerous factors like lower domestic consumer spending owing to lesser availability of consumer credit and sharp decline in demand in international markets, dampening exports, and tight controls on corporate expansion plans as well as corporate spending,” said the report of Karvy stock broking.

Commenting on the Sensex EPS the report added that, “If the risk of corporate profit de-growth results in the Sensex EPS coming below 850 in FY09, it can have an adverse impact on Indian stock markets. Moreover, the risk of negative growth is likely to trigger a lower P/E multiple for the index. All these could compound the risk for the Indian stock markets.”

In the last few months, foreign institutional investors (FIIs) sold heavily on the Indian bourses, resulting in flight of capital overseas. FIIs turned net sellers to the tune of Rs 9117 crore in CY09. They sold in excess of Rs 40000 crore in FY08-09.

“The sharp depreciation of the Indian rupee against the US dollar and expectations of further weakness in the rupee against the US dollar also triggered the flight of capital overseas. The government’s burgeoning market borrowing program has also put pressure on the rupee. Thus, a further flight of foreign capital may pose increased risk for Indian markets,” added the report. There is the uncertainty of the forthcoming general elections. The elections will decide whether there will be a stable government at the Centre which will take the necessary measures to check the economy from a likely deflation or the current recessionary trend.

Buy Karvy expects a formation of weak coalition. “The possible formation of a weak coalition government in India itself is a risk for the stock markets, particularly at a time when a strong and stable government is the need of the day to tackle the economic crisis. The competition between the two major camps-UPA and NDA-is likely to be compounded further with the formation of the Third Front.”

The recent heinous terror attack on Mumbai has impacted the economy and thus has increased the risk for foreign investment in India. “The increasing terrorist activity in the Indian sub-continent is a risk for stock markets. The 26/11 terror attack on Mumbai, the recent terrorist strike on the Sri-Lankan cricketers, besides increasing political turmoil among our neighbors, raise India’s investment risk profile,” the report concluded.

source: Economictimes

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