Merrill Lynch pegs down Sensex cos earnings to 17%

Bank of America Merrill Lynch today said the current market correction will continue till the third quarter end and Sensex companies will see further paring of their earnings to around 17% this year.

"The current market correction will continue till about the end of this summer, primarily due to a possible downgrade of the US and the resultant slowdown in the world's largest economy; continuing tightening in emerging markets; and the end of the qualitative easing by the US and the liquidity crunch that would throw up," Bank of America Merrill Lynch global head for wealth management investment strategy and deputy director, research investment committee, Joe Zidle told reporters here.

Pointing out that 15 of the 21 central banks in the emerging markets have already hiked interest rates to batten down inflation, Zidle said, these economies will have to continue to do so unless global commodity prices soften.

It can be noted the Reserve Bank has increased its key rates 10 times in a row since March '10 to bring down sticky inflation and is expected to do so on July 26 too.

He further said, liquidity has already started easing from July as the US Fed ended second round of qualitative easing, which had pumped in nearly USD 600 billion more cheap money into the system to help support a tottering US recovery, but most of which found their way into emerging markets, thanks to better returns in those markets.

On the domestic market, DSP Merrill Lynch India managing director and research head Jyotivardhan Jaipuria said considering the poor performance so far - India is the worst performer among the emerging markets after Brazil - the Sensex companies will see a further erosion in their profitability this fiscal and would most probably end the year with only a
17% spike in profits.

Earlier Merrill Lynch had pegged the earnings of the Sensex companies at 22% for this year. Despite the recent rally in the markets, the Sensex is still down over 9% from its December 31, 2010 closing. However, Jaipuria did not rule out the possibility of a yearend rally.

The bank also opined that oil prices are unlikely to go up further and commodities may also soften in line with the general weakness in the global economy. However, it said the gathering dark clouds in the Eurozone will be the biggest challenge.

On the possible downgrading of the US sovereign rating in the light of its high fiscal deficit and lack of uniformity among American politicians to up the deficit target, Zidle said, if at all rating agencies lower the rating to AA from AAA, it would still be the best sovereign rating in the world.

"So there is no likely impact of a possible downgrade of the US on the markets," Zidle said.