The Hindu Business Line : Market View

As the global markets went into a tailspin, the Indian markets were also affected from a technical point of view. The sell off resulted in the brokers and their clients facing margin calls on the derivative positions. To honour the margin calls, the brokers on had to sell on behalf of their clients.

Lot of money has also gone out of the system as application for the IPO of Reliance Power. This cascading effect resulted in a sharp correction.

On the other hand, the domestic institutions have taken to buying. With the tax saving season round the corner, more money should come into Unit Linked Insurance Plans, which will find its way into the stock markets.

In the first week of February, a large pool of liquidity which is currently blocked in Reliance Power IPO should come back into the system, thus improving the liquidity situations in the hands of investors. Therefore, we feel the market would find lot of support at the current level. Looking forward, we believe that the Indian growth story remains intact, as it is a domestically oriented one with exports accounting for only about a fifth of the GDP. The growth drivers of consumption, infrastructure spending and corporate capex remain as strong as it was a few days ago.

In the short term, it may be difficult to time the bottom, but from 12-18 months perspective, we would view the current fall as a good opportunity to add to one’s holdings.

Post the huge correction in stocks, the RBI’s worries may take a backseat thus making a strong case for a cut in interest rate.

BIRLA SUNLIFE MUTUAL

India has been a principal beneficiary of the gush of liquidity in the wake of the formal acceptance of the sub-prime crisis as reality in August 2007; this has since taken wing to engulf multiple parts of the credit market in the US and parts of the developed world. Large-cap stocks in India were the story of August-October 2007; mid- and small-caps also enjoyed a long overdue catch-up rally from late November.

Foreign Institutional Investors (FIIs) were the drivers in the August-mid October period, when their net flows touched more than $ 10 billion in the space of a few weeks. Their level of activity became moderate in the aftermath of the new regulatory framework announced by the Securities and Exchange Board of India for FIIs in October. Despite this development, the market held close to peak levels on the support provided by domestic institutional investors, especially insurance companies, as well as speculative trading support with rising retail participation, especially through the derivatives market. Pockets of excesses had also emerged. Pricing greed in IPOs has also become increasingly prevalent. We have had a reality check now.

As a high-beta market during that phase of major gains between August and December, it was only likely that globally-driven weakness in markets, linked to the US recession will also result in India taking a hit. This is what has happened now.

At about 15.5K, the Sensex is at a price-earnings multiple of 14.6 times & 13.3 times FY 2009 and 2010 earnings without factoring in embedded value for genuinely well-established businesses in companies such as Reliance, HDFC, ICICI Bank, Larsen & Toubro and State Bank of India, to name a few; the embedded value could account for about 15 per cent.

This valuation is based on earnings growth of between 12 -15 per cent, a level India Inc should comfortably manage even after factoring the expected slowdown in GDP growth. From a fundamental perspective, we do not expect the downside to be deep from present levels. Large-caps are likely to lead the recovery.

Will themes change?: Infrastructure, rural prosperity, resources, changes in the energy landscape, demographics and outsourcing are likely to remain the key pillars of growth in India.

From a markets’ perspective, domestic-investment led themes will continue to remain more attractive and can be expected to lead the process of recovery once stability emerges.

Timing the market best avoided: We believe investors should have a disciplined investment approach that ensures that they are invested at all times.

It is always tough to get the call right at all times both on the upside and downside. If a person had Re 1 invested at all times in the Sensex since 1979, it would be worth about Rs 160.

If you had indulged in timing and missed the best 10 days, the value will be lower at Rs 60 and if you had missed the best 40 days, the value wil be even lower at Rs 10. Long-term investors should use the ongoing weakness to enhance exposures to the India story.

SUNDARAM BNP PARIBAS MUTUAL

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