The Hindu Business Line : Last week of 2007 may end on positive note

The Indian stock market may not end the year at its peak, but is likely to keep its benchmark index figure tantalisingly close to it. Market intelligence suggests that the big operators, who appear to be dictating terms in the near term, would not, perhaps, let the last week of 2007 end on a negative note.

But the coming year surely holds out a simple promise of being different. Indian equity market saw a volatile but booming journey during 2007.

The recent sell-offs by foreign investors could not make much of a difference in the main indices as local investors came forward to absorb the supply.

Though forward price to earnings ratio for emerging Asia has declined to around 15 from 16.5 a month ago, the Sensex is currently having a P/E of 26.

If the global market is to be guided by “attractiveness” of the valuation, then the Sensex should go through a deep correction. Many investment strategists at the top global funds tend to indicate that in the present scenario an emerging market with a price earning ratios between 12 and 14 could be considered as “favourable” to attract strong flow.

But Dalal Street did not allow this comfort level to FIIs during the year and is unlikely to permit this in 2008 too. Money flowed in because of better corporate earnings growth prospects and relatively safe investment climate.

Conflicting forces

But now that the global financial markets are increasingly facing conflicting forces, liquidity inflow may not be taken for granted.

According to IMF, continued turbulence in global financial markets could disrupt financial flows to emerging markets, which are afflicted by large current account deficits and substantial external financing needs.

Indian policy responses so far sent out mixed signals for incoming portfolio investments. The central bank seems to indicate that overseas investment in the secondary market has a direct bearing on asset inflation and indirect, but negative impact on the currency and economy management. But, neither the Union Finance Ministry nor the market regulator appears to share this discomfiture.

Apprehension

Some large overseas players are apprehensive that Indian corporate earnings have peaked out and are likely slow down in 2008.

It is not surprising if this set adopts tactical hedging of their equity holdings and resort to temporary profit booking. In the short term, one can expect preference for large-caps over small and the medium as also growth stocks over value stocks. But these are all strategic readjustments.

2008 is likely to be different in terms of testing the corporate earning momentum in the backdrop of a more demanding economy.

Fundamentally, this alone would decide whether Indian equities should fetch unusual premiums.

(Reponses may be sent to jayanta_mallick@thehindu.co.in)

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