The Hindu Business Line : Sentiment turns cautious

At beginning of the new trading year, some Dalal Street experts have begun to feel cagey about valuations. The benchmark has corrected only about five per cent or so from its all-time high. Interestingly, this is happening at a time when overseas fund managers have readjusted their strategies for the Indian equities after the regulator placed certain restrictions on the participatory notes. Morgan Stanley feels that the valuations are not cheap, but a combination of mid-teens forward earnings and liquidity-driven P/E expansion is quite likely scenario in the next six to 12 months.

Lack of confidence

The H1 average corporate earnings in the twenties do not appear to generate enough confidence. As a result, the aggressive growth discounting strategies are giving way to cautious focus on value metrics. This means in the short term, a diverging trend in strategies could be seen on the street. While, in the short-to-medium term, the global liquidity may tend to flow in, the local players, including big-time market makers, may opt for profit booking.

As it is, a falling dollar and softer bias in the US rates make the situation ideal for global liquidity to find Asian markets lucrative. The appreciating rupee is perceived as positive by the FIIs and as long as India maintains the currency flexibility, the perception is not going to change.

Host of problems

However, to Indian investors strengthening of rupee indicates a whole host of problems – right from rising exports competitiveness to increasing job losses. The fallout is also foreseen in the overall consumption and thus the growth. The possibility of an election in the next six months and impact of rising global crude oil price indicate that in the medium-term cross currents may complicate the economic outlook.

At present, the biggest dilemma for policymakers and the central bank is to strike a balance between moderating the inflation and maintaining a growth momentum. Though the wholesale price index has been declining, the consumer price index has not shown a declining trend in the recent months. The rise in CPI is being driven largely by the food items. Food inflation has been averaging close to 10 per cent in the past six months.

The net effect of the economic factors on the corporate balance sheet does not suggest a bullish picture.

The market may have entered a phase when it is difficult to make your mind. The long-only market leaders seem to suggest a negative terrain in the immediate term. This is likely to produce volatility and deflate the sentiment further. The search for valuation pockets may also take a break.

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