MUMBAI: Last year around this time, when brokers and investors gathered at the Bombay Stock Exchange to flag off Samvat 2065 — a year in the
Hindu calendar — the mood was morose. Global markets were going through one of their most turbulent periods and a recovery seemed a distant prospect, then. A year later, as market participants assemble to welcome Samvat 2066 on Muharat trading day on Saturday, they would be a relieved lot. With key indices having risen 110% over the last seven months, Indian
shares are now just 20% away from their record highs touched in early 2008.
Despite all the optimism around, driven by initial signs of recovery in the Indian economy and stability in global financial markets, concerns over the endurance of this rally remain. Market participants fear the market may choke on an overdose of liquidity, which has been fuelling stock prices in the past few months.
“Though liquidity has rescued global markets and companies, it has driven
stock prices to higher-than-expected levels and, now, will result in higher volatility in earnings and PE (price to earnings) too,” said Anand Shah, head — equities, Canara Robeco Asset Management. “We should not assume that the kind of liquidity that we are seeing now would remain and the reversal of liquidity could lead to a fall that is much-more than needed,” he added.
Central
Banks world-wide, including India, have started signalling the possibility of tightening of monetary policy early next year on fears that excess money supply may spark rapid price jumps of commodities and goods. Brokers said the hike in rates could result in some foreign investors liquidating their equity portfolios in emerging markets, including India, that have been created by borrowing at near-zero
interest rates in the US. A hike in interest rates in the US would result in dollar rising against the rupee, resulting in the value of their Indian holdings eroding.
Foreign institutions have pumped in close to $13 billion since early March, when the markets resumed their ascent after the tumultuous 14 months from January 2008. This, coupled, with domestic institutional inflows have driven Sensex’s valuation to close to 18 times 2009-10 and 15 times 2010-11 estimated earnings, considered steep in comparison with other markets.
“Large liquidity flows into the Indian market from global and domestic funds has resulted in steep increase in stock prices, without commensurate increase in earnings,” said Sanjeev Prasad and Sunita Baldawa of Kotak Securities in a report. “We recommend investors to prepare for a likely correction in the Indian market over the next few months,” they added.
Market participants are estimating a correction of 8-10% in benchmark indices and a bigger fall in the mid- and small-cap shares. A possible fall should be used to buy shares that will benefit from the likely revival in India’s and global economic growth, they said.
“Indian equities continue to be vulnerable to a sell-off in global equities, or a sudden spike-up in crude oil prices. However, we believe that investors should use such volatility to buy Indian shares since the growth outlook for the next 12-18 months remains firm and is still not priced into equities,” said Amitava Neogi, ED of Morgan Stanley Private Wealth Management.
Enam Securities, in a recent report, said: “Any corrections should be used to build core holdings in long-term scalar sectors linked to consumption (retail), infra (power), savings (insurance), & global suppliers (resources and IT).”
