Despite some positive macro indicators at home (rising cement dispatches, increasing automobile sales, persistently growing telecom subscriptions, declining inflation, more rate cuts by the central bank etc) market sentiments have deteriorated significantly in the past few weeks. The deepening global recession and India specific issues (a marked deterioration in the government’s fiscal health and uncertain outcome of general elections), have dragged down the markets.
- The markets across the world have slipped to new multi-year lows on account of the deepening economic recession globally. In the USA, the economic realities have overshadowed the short-lived euphoria that was created by the rhetoric of the Obama administration. Apart from the USA, the economic news flow from the other developed part of the world, such as Europe and Japan, has also worsened significantly in the past few weeks.
- The Indian equity markets have also witnessed a sell-off in line with the meltdown in the global markets. Apart from the global concerns, there are India-specific issues that have spooked the markets. First, the higher than anticipated consolidated fiscal deficit of 11.4% for the current fiscal 2008-09 and its fall-out on the economy (eg a possible review of the country’s sovereign rating). Second, the outcome of the forthcoming general elections remains uncertain with the growing possibility of a coalition government heavily dependent on the regional and smaller parties. Third, the recent incidents in neighbouring countries like Pakistan, Sri Lanka and Bangladesh have added a new dimension of regional instability as a potential risk for the foreign investors.
- Given the growing concerns (global and domestic) and the absence of any positive triggers till the new government comes in place by June this year, the risk of a break-down from the trading range of the past four months has increased substantially. However, the silver lining is that such an eventuality could be a once in a lifetime opportunity for building a long-term portfolio. Moreover, the markets would continue to provide strong trading rallies despite the downward bias.
- Notwithstanding the near-term concerns, we continue to believe that the situation would improve substantially by the last quarter of CY2009. There is a growing consensus that the worst could be over for the global economy by the end of CY2009. Moreover, India would be among the first few countries to revive. Especially since its rural economy (accounts for 45% of consumer spending) has shown resilience and the wage hikes to government employees would also act as a growth stimulus. By the end of 2009, corporate performance should show a distinct improvement on the back of the lag effect of the central bank’s loose monetary policy, lower energy cost and favourable base effect. In terms of valuation, the Sensex is trading at around 10x FY2010 earnings considering a flattish growth in FY2009 and a marginal decline in its earnings in FY2010.