How the experts got it wrong

How the experts got it wrong

Forecasting is a science. But in uncertain times, it becomes an art. Unprecedented turn of events in the past 12 months has made experts look like tyros.

Forecasting is a science. But in uncertain times, it becomes an art. We know how the small investor often gets it wrong. How the novice misses the woods for the trees and ends up making a loss. But the unprecedented turn of events in the past 12 months has made even experts look like tyros. Brokerages, the so-called market analysts whom even seasoned players look up to for advice, were completely off the mark in their estimates of stock prices and the economy. Of course, they were not alone. Practically everyone was taken by surprise. Money Today looks at some of the predictions by brokerage houses on select sectors and other macro-economic indicators, and how they missed the target.


Demand has fallen because the rise in home loan interest rates has made property an unviable investment

Emkay research forecast on 22 April 2008: “Large realty companies have acquired land aggressively in the past two years at low cost. They have sufficient land bank to ensure strong growth for 8-10 years.”
What went wrong:
Crude went up from $105/barrel in April to $135 in June. Inflation and interest rates shot up, which hit the demand for housing.

Price (Rs)Variation (%)
ThenTargetCurrentFrom thenFrom target
DLF 6511,115486-25.3-56.4
Unitech 268360159-40.7-55.8
HDIL 7181,491370*-48.5-75.2
Orbit Corp 4511,179291-35.5-75.3
Sobha Developers 5841,408274-53.1
Current prices as on 11 September 2008
*Adjusted for bonus



A flurry of hikes in CRR and repo rates has hit the bottom line of banks. Rising interest rates have slowed down credit offtake

Religare forecast on 4 Jan 2008: “Interest rates appear to have peaked out and the RBI will begin to cut rates in the next three to four months. This will help increase the growth in credit offtake. We believe that stronger PSU banks will soon witness a re-rating.”

What went wrong: What was being perceived as the end of interest rate hikes was actually the beginning. Most frontline banking stocks have almost halved in value since the beginning of the year.

Price (Rs)Variation (%)
ThenTargetCurrentFrom thenFrom target
Indian Bank 212257135-36.4-47.5
IOB 201241101-49.8-58.1
Allahabad Bank 138



Despite high demand and impressive growth plans, hotel stocks have suffered because of the overall economic downturn.

India Infoline forecast on 14 Aug 2007: “Sustained economic growth and lack of supply in the past three years have pushed up average room rents at premium hotels. Going forward, we expect demand to remain robust on the back of a healthy economic growth.”

What went wrong: The rise in air fares and the prospect of an economic downturn led to a slowdown in travel. Hotel stocks have underperformed the broad market in the past year. Bluechips are trading at 52-week lows.

StockPrice (Rs)Variation (%)
ThenTargetCurrentFrom thenFrom target
Indian Hotels 14016476.85-45.1-53.1
Hotel Leela 46.55633.95-26.9-39.4
Taj GVK 155



After several years of rapid growth, get ready for a slowdown

Estimates go awry: Research houses have scaled down their projections of the GDP growth rate in 2008-9. The consensus is close to 7.9%, while RBI pegs it at 8%. Some see a low GDP growth as a good sign—at least it will keep RBI from raising interest rates again.

Estimates of real GDP growth rate (%)
Research houseInitial estimateRevised estimateVariation from RBI
State Bank of India
Goldman Sachs87.8-0.2
Deutsche Bank7.97.7-0.3
Crisil 8.17.8-0.2
Merrill Lynch8.17.6-0.4
RBI’s estimate of GDP growth in 2008-9 is 8%



Prices were rising, but the spike came when fuel prices were hiked

Waiting for the base effect: Inflation is expected to cool down sometime in March-April next year, when the high base comes into effect. But don’t count on it because the fall in the rupee against the dollar is likely to keep domestic inflation buoyant.

Estimates of consumer price inflation
Research houseInitial estimateRevised estimateVariation from actual
State Bank of India5.56-2.3
Goldman Sachs511.53.2
Deutsche Bank4.99.6
Merrill Lynch55.1
Actual consumer price inflation in July 2008 was 8.3%



Speculation heated up the market. It has cooled down, but is still unsteady

Edelweiss forecast on 9 Jan 2008: “Increase in upstream capital costs will require crude to sustain at $70 a barrel. So, we have hiked our long-term price assumptions.”

What went wrong: Crude shot up to $146 a barrel. It has crashed to $100, but a rising dollar means the gain is nullified.

Estimates of average crude price in $/barrel
YearInitial estimateRevised estimateVariation from actual
Average price in 2007-8 was $81.83. In Apr-Aug 2008 it is $122.03