The Hindu Business Line : Market View

When one looks at the P/E of the S&P CNX Nifty, the valuation is far in excess of such markets as Brazil, Russia, Korea and Thailand. On this basis, the Indian market appears expensive. Even when one looks in isolation at the earnings yield, equities are again approaching overvalued territory, especially when compared to bond yields, which are retracing back to 8 per cent, or higher, levels. The key to whole equation lies in the Price to Earning by Growth (PEG) ratio which is where the justification for the premium P/E multiple appear to lie. If you consider India's earnings growth of around 15-20 per cent expected for FY08 then we make the conclusion that the PEG of India is far cheaper than markets like Korea, Taiwan, Thailand or China. India's allure is healthy corporate profitability across a wide range of industries.

Currently with prospective P/E's at 15-16 x the PEG applicable to India appears to still make it an attractive investment case at these levels.

OptiMix View and Outlook

As the economy slows down by about a percentage point, there is likelihood that the stress may be more pronounced in the mid -and small-cap spaces in the near term. The possibility of the interest rate cycle peaking in the later part of the year may be a crucial fundamental and sentiment turning point for mid-and small-cap stocks that have languished for more than one-and - half years now.

In this back drop, a stock-specific approach will be the way ahead. Unlike in the past four years, when the across-the-board stories were aplenty, this will be the cornerstone of our investment strategy. At this stage of bull market, it is likely that even attractive stock themes may take longer to deliver value, in contrast to trends of the past few years.

Sundaram BNP Paribas Mutual

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