Market Outlook – A Complete Overview Of The Volatile Indian Capital Market
The calendar year 2008 has seen a very volatile Indian capital market. From the highs of about 21000 in January 2008, the BSE Sensex came down to a low of about 12500 in July 2008 before recovering to the current levels. In the process, it wiped out all the gains accumulated since April 2007. Before forming a medium-to-long term strategy for the markets, one should look at the reasons for this volatility.
In late 2007 and January 2008, the market marched higher on the back of high GDP growth, good and corporate performance. The significant FII flows in late CY07 (September – December 2007) helped markets ride higher. This euphoria led to the Indian markets out-performing Asian peers by about 15% in December 07 – January 08.
However, during this period of euphoria, markets ignored the factors which were impacting the global markets negatively. These were in the form of rising crude prices, the sub-prime crisis in USA and depreciation of the USD v/s major currencies including the Japanese Yen. On the valuations front also, at 21000 levels, the markets were already discounting the next year (FY09) earnings by about 21x, which was at the higher end of the valuation band.
These global concerns led to an eventual withdrawal of liquidity from Indian markets, resulting in a steep fall. Subsequently, domestic factors like rising inflation, increasing interest rates, rising fiscal deficit (due to ever-increasing crude / commodity prices and subsidies) and prospects of an economic slowdown took over. This led to the under-performance of the Indian markets in 2QCY08 v/s other emerging markets.
If we look at the current scenario, inflation has touched 12.4% (on the back of high crude and commodity prices) and is expected to remain at higher levels in the coming months, according to the RBI. The monetary and fiscal measures taken by the RBI and Government are having an impact on growth. The high commodity / crude prices and interest rates are impacting corporate profitability.
While this is negative from the stock market perspective, we think that, the same is now already getting factored in. In fact, consensus FY09 GDP growth is already lower than RBI’s estimate of about 8%. The markets are also cognizant of the fact that, inflation may inch up further in the near term before cooling down and interest rates may move up marginally over the current levels. However, a further deterioration in the US economy and a strong surge in crude prices remain the key risks.
Crude and commodity prices have fallen appreciably from their highs, of late. With the global economy slowing down, demand is expected to moderate. Some OPEC constituents have also increased the supply of crude. This is expected to provide relief to the global equity markets. Monsoons in India have also revived in the recent weeks, providing a much needed relief on the inflation front. Recent developments on the political front suggest that, stalled reforms may see the light of the day in the near term.
We expect markets to move up once it gets more visibility and confidence in FY10 earnings, which will make the markets attractive with a medium term perspective. This should lead to improved FII liquidity especially as India, despite the slow-down, is expected to be the second-fastest growing economy in the world. Post the recent under-performance, we believe that, valuation premium of Indian market has also reduced significantly.
To conclude, negative global and domestic factors have impacted the economy, corporate performance and the markets in CY08. However, these factors have got positive over the recent past. With FY09 valuations looking fair, we expect markets to undergo a time correction in the short term before seeking a trend. The triggers, which are expected to provide the medium term direction are FY10 earnings, inflation, crude prices and the US economic scenario.
