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Wednesday, May 18, 2011

Sensex: Targeting 16000 in 3-4 Weeks- Ambit

History points to a strong as 'risky assets'. If oil prices were to fall by US$20/barrel in the wake of QE2 winding up, will Indian Equities rally (since fuel cost pressures will ease) or will the Sensex slump (keeping in-line with the strong historic positive correlation)? Our sense is that the latter (a slump in the Sensex triggered by a correction in all global 'risky assets') is more likely in the short run. This should then be followed by a healthy rally as cost push pressures ease.

The +91% historic correlation between oil prices and Indian equities correlation between oil prices and Indian equities, presumably because global investors view both these

In our email dated May 5, 2011 we highlighted how we expect the Sensex to grind lower to 16,000 by June 2011 as two sets of dynamics unfold simultaneously namely: 1) India's premium to the broader Emerging Market pack reverts to its long term average of 28%; and 2) consensus pulls back its FY12 EPS estimates by 7% as the impact of higher cost pressure is factored in.

A strong 91 per cent correlation between global oil prices and Indian equities presumably because investors view both as 'risky assets'. Such a correlation strongly suggests that a pullback in oil prices is unlikely to lead to an instantaneous rally in the Sensex. Hence the balance of probabilities would suggest, that in the short run (i.e. the next 2-3 months) a 16,000 Sensex remains the most likely outcome.


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