The Hindu Business Line : Market View

If you compare the P/E for growth available globally, only then can markets like India and China provide strong arguments for growth, which are multiples of what may be achieved in developed economies. Thus can P/E multiples in these markets be close to double that of developed countries? Unlikely, due to risk premium afforded to more volatile investment markets such as India and China. However, if the US market is trading at 15x for FY08 earnings (December) then it can be argued that a market such as India’s should trade closer to 20-25x FY09.

We have currently approached the bottom end of this band, but there is more scope for upward revisions based on the following factors occurring:

Indian earnings being priced outwards on a FY10 basis due to strategic initiatives being undertaken locally

Further interest rate cuts by the Federal Reserve

Continued relative currency appreciation

Earnings meeting expectations or surprising on the upside

Over the next quarter we expect money flow to be net positive with a continual tug-of-war between fundamental earnings and strategic valuations. It is unlikely that S&P CNX Nifty based stocks will hold all the attention in the next phase of market movement. Increasingly, more stocks are entering the radar screens of FIIs in the $1-billion plus category of market capitalisation.

Optimix View and Outlook

In the emerging markets universe, India is a safe haven as domestic triggers such as consumption and infrastructure principally drive its growth story. The share of exports to GDP has, however, risen from about 13 per cent in the early part of the decade to 23 per cent.

What cushions India is its relatively low exposure to the US as well as the Euro zone that is also expected to see a moderation in growth through 2008. How does India fare on another point of potential vulnerability relating to exports?

Linkage to intra-region exports: A US slowdown, and, the more so a recession, is expected to have a significant bearing on exports from China; GDP may be trimmed only by 1–2 percentage points due to the domestic growth impulse. Several countries supply intermediate products going into the exports from China and they could be impacted. India is well placed on this score, too, as exports to China accounts for only about one per cent of GDP (8 per cent of all exports out of India) and a significant component of this export basket is resources.

Sundaram BNP Paribas Mutual

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