Bears Everywhere

The global contagion has gripped the Indian stock market yet again. Bad economic news in the US, a fresh spurt in crude oil prices as well as the ongoing sub-prime debt problem in the US have wrought havoc in global equity markets. Foreign institutional investors are beating a hasty retreat from places like India, where inflation has touched 8.24 per cent and is slated to climb higher in the next few weeks. With uncertainty about how corporate profits will bear up in a slowing economy, and question-marks over macro-economic policy (will there be further monetary tightening as inflation reaches into the double-digits?), investors seem to be coming to the conclusion that Indian stocks are over-valued. Index levels are close to the levels of March, when the market had bottomed out, and there is no shortage of market players who predict that share prices could drift even lower. The mood is clearly bearish.

According to Bloomberg data, the Indian market trades at a one-year forward P/E (or price-to-earning ratio) of over 15 times, while Brazil and Russia are trading at 13 times and 10 times forward earnings, respectively. The Indian number signals a degree of optimism about the future that most people no longer feel. It is no wonder that India's weight in emerging market portfolios is being steadily reduced. As the inevitable outcome, foreign institutional investors (FIIs) have turned big sellers in the past few weeks. After investing $24.5 billion in the cash market in 2006 and 2007, FIIs were net sellers to the tune of $3.1 billion in January 2008. Between February and April, they brought back $1.48 billion, but FII sales in May 2008 were $1.16 billion. In the first four trading sessions of June, they sold shares worth $0.88 billion. That would explain why the Sensex has lost nearly 8 per cent since the end of May, against the Dow Jones decline of just 1.9 per cent (till Friday).

What the market tends to do in such a bearish environment is to ignore the good news that keeps filtering through. For instance, credit growth in the first two months of the year has continued to be healthy, and direct tax collections in this period have been so good that the finance minister wants to raise the target for the year. April exports were buoyant, and auto sales in May were good. Overall economic growth in the year is unlikely to fall below 7 per cent, and may indeed get a one-time boost if the Pay Commission award gets implemented before long. Indeed, the net outflow of dollars on the stock market account has solved at least one macro-economic problem, in that the rupee has stopped climbing against the dollar and has in fact lost 7 per cent and more against the US currency in recent weeks. This will make imports costlier, but will help the software industry get better revenue realisation, and boost other export sectors that had been feeling the pinch of a more expensive currency. It will also help the Reserve Bank unwind some of its market purchases, and thus help monetary management.

As against this, companies that face a slowdown are almost certain to be trying to squeeze out costs, and this will lead to contraction pressures. Perhaps the most important indicator is corporate profits for the January-March quarter, which show a slowdown, and dividend pay-outs which also show moderation. It is no wonder that the Sensex, which first hit 15,000 in early July last year, is back to that level 11 months later.

(Source: B.S.)