DSP Merrill Lynch fund managers survey reveals vigorous optimism

The economic outlook too has improved, as respondents expect the effect of the lower than normal monsoon to be more than neutralised by the stronger growth in other sectors. This is a marked departure in the pessimism, due to the initially truculent monsoons, reflected in its mid-year survey.

Highlights of the December 2004 survey: Growth & Monetary Outlook

  • GDP growth expectations for FY05 are converging to the 6-7 per cent band. Since the last survey, there has been a distinct upward revision of expectations, with some fund managers also looking at GDP growth ending the year between 7 per cent and 8 per cent. Our estimate for GDP at 6.2 per cent is in the consensus band.
  • Interest rates expectations have moderated significantly, given the sharp rise in yields from 5.75 per cent to 6.75 per cent, following the reverse repo rate hike to 4.75 per cent. No fund manager expects the 10-year yield to rise over 50bp. Around half the respondents expect yields to remain unchanged with over a third expecting yields to be lower.
  • Views on the INR / USD exchange rate have also veered to the strongest this fiscal. 87 per cent of the respondents believe that the rupee would appreciate against the US Dollar.

Corporate Profit Outlook Corporate profit growth projections have strengthened, in line with stronger GDP expectations and reduced global uncertainties.

  • 27 per cent of fund managers expect 10-20 per cent earnings growth (down from 82 per cent),
  • 73 per cent expecting over 20 per cent growth (up from 18 per cent) largely in line with our expectations of 20 per cent.
However, DSP Merrill Lynch believes that corporates are now probably at the peak of the earnings upgrade cycle.

Earnings outlook most favorable for:

  • Capital goods and engineering (infrastructure and investment demand) followed by Cement (growth theme again),
  • IT (despite rupee appreciation) and
  • Financials.
  • Oil & Gas For the first time.

A few fund managers (though a small fraction) believe that the market is over-valued. The number of fund managers who believe that the market is now 10-20 per cent over-valued is down to only 40 per cent with a majority (53 per cent) believing that markets are fairly valued.