The Hindu Business Line : Market View

Rare has been the year over the past decade-and-half when markets have stepped into October in such a bullish state. Usually stock prices tend to be tepid in the July-September quarter and make an upward move from October and more particularly, November. This has tended to last till February of next year.

As a result, for more than 80 per cent of the past 15 years the October-February period has been bullish for stocks. This is such a set pattern that it has become an integral part of sell-side research also over the past two years.

October 2007 is different and has started with all key indices tracking different parts of the market moving and trading close to new peaks.

A cautious view

The spurt in prices has been so sharp that we are now inclined to view the near term with a high degree of caution. In April, we had shifted to a more positive outlook on the near-to-medium term and reiterated that stance even in our `Market Outlook’ for September.

The upside that we expected to emerge in a phased manner through 2008 has been front-ended to a significant extent, due to a gush of liquidity.

We do recognise that if the liquidity flows continue to be as robust as they have been for the past two months, stocks could move farther from fundamentals. At this stage of the bull market, we are, however, circumspect on the near-term outlook; the odds on a consolidation and/or corrective phase are higher now than a few months ago.

Sundaram BNP Paribas Mutual

For the Indian markets, the Fed rate cut was the cause (for the bull run) and the effects were… huge FII inflows, equity markets at all-time high, Rupee appreciating to sub-40 levels… and so on.

The Sensex is trading close to 18x FY09E earnings. Does this mean that Indian equities markets are overvalued? Consider this…

The equity earnings yield at FY09 earnings is 5.7 per cent (Earnings / Price x 100). This is lower than the one-year G-sec yields of close to 7 per cent in India. According to investment theory, one should expect bond plus returns from equity investments to compensate for the extra risk of investment in equities.

Going by this theory, either equity asset price should come down or debt asset price should go up. However, this may not happen, at least immediately.

The disparity may be sustained as long as the outlook on the Indian economy is strong and there is a significant interest rate differential between India and other major economies.

In such a scenario, the much talked about carry trade may continue, triggering easy liquidity flow.

Post Fed cut, a lot of FIIs have stepped up their investments in Indian equity markets, for three main reasons: YTD underperformance of the Sensex vis-À-vis other peers; relatively reasonable valuations (Chinese index is trading at a PE of more than 40); and physical exports to GDP ratio is low at about 15 per cent, signifying lower dependence on external sector and that internal consumption is driving the economy.

ICICI Prudential Mutual

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