At least two brokerages this week cut their targets on the Sensex and as we write one more brokerage has downgraded their target on the Sensex. These targets have become a big joke, because every time the markets fall analysts and brokerages reduce their targets.
What are these Sensex targets set by brokerages?
The good thing for brokerages is that you are not accountable for your action. So, you can predict anything and anytime. Nobody is going to question you why you predicted 1,00,000 points on the Sensex. All one can do is pity gullible investors who put their money based on these targets.
The real problem is that these predictions tend to go haywire. Like those who were predicting the Sensex this year at 32000 and 33,000 points have been swift in scaling that prediction down after China caused a mayhem across global markets. In Sept with the index at 26,700 points to believe that it would scale 32,000 points by December would be "wishful thinking".
It is sometimes a good idea to be a little sensible in predicting targets. For almost one year corporate and investors have been awaiting the earnings cycle to pick-up, but nothing has ever happened. Core sector data was awful and the GDP numbers were even worse with GDP slowing to 7%. Interest rates have not been declining and we do not know what would happen.
Under the circumstances if you predict 32,000/33,000 on the Sensex it would imply a trailing p/e multiple of almost 23 times. This is certainly high and no where near historical averages.
So, investors and analysts before making predictions must pay heed to fundamentals and not lead gullible investors into investing at any and every level.