The Hindu Business Line : Market View

With continued ability to grow earnings at 20 per cent year-on-year, the market remains resilient to significant falls from these levels. Currently trading at close to 18x, we expect the floor to the market (Nifty) to be around 4600 (15x FY09 earnings) i.e a 20 per cent fall. Alternatively, potential upside from these levels are retracements back to all-time highs i.e. 6300, which can occur if decoupling continues as investors do not become risk-averse but simply shift their funds to where currency movements are positive and visibility of corporate earnings growth is strong. In this volatile environment investors are likely to cling to large cap stocks more readily. Typically even local investors only scale down the capitalisation curve once valuations strongly favour mid and small caps. Additionally the focus is likely to shift from strategic plays looking at 2010 and onwards, towards sustainable earnings growth stories.

Optimix View and Outlook

The new consensus that is taking shape is that the US economy is slowing sharply and may fall into a recession that could spark a global recession. There is no doubt that the US economy is slowing, at least with regard to manufacturing activity which has dropped substantially due to inventory adjustment. Moreover, this has been confirmed by the Fed chief, Dr Ben Bernanke, and conforms with our prior observations.

However, we must be careful when extrapolating from this. A slowdown is not a recession and the downturn in the US economy should not pose a threat to global growth, which is finding new sources in the emerging regions where endogenous demand is rising.

Furthermore, central banks have already shown that they are willing to do everything necessary to bring inter-bank markets back to normal and thus protect growth by dispelling the threat of a credit crunch. Although some central bankers seem to be dragging their feet a bit (which is the least one can say about the ECB!) no one can accuse them of just standing by and doing nothing in response to the difficulties observed in financial markets and the real economy.

We believe the medium-term outlook for equities is positive since fundamentals remain solid (based on our scenario of only a limited slowdown in global growth), valuations appear to be attractive and liquidity remains abundant, thanks to large foreign reserves and petrodollars. With market Cassandras now focussing only on such negative factors as recession, inflation and stagflation, we would once again like to point out that the above positive factors will be providing structural support to equity markets.

In the short term, the micro and macroeconomic concerns mentioned above could induce sharp jumps in share prices until visibility begins to improve. We are therefore going to adopt a more prudent stance over the coming month by trimming our overweight position in equities and adopting more defensive positions geographically and in terms of sectors.

BNP Paribas Asset Management

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