The Hindu Business Line : Market View

During the latter half of 2007 we saw strong decoupling by emerging markets, particularly India, as liquidity shifted from depreciating dollar investments towards the Asian growth corridor and as investors parked money into high growth regions. However, in 2008 this strategy has come unstuck as the highly leveraged positions established in emerging markets are being unwound and investors look to liquidate and return when market malaise is over.

Additionally the correlation between the S&P 500 and the BSE Sensex shows that when the markets correct there is a higher correlation between our index and the US broad market. Generally, corrections in the Indian market over the past three years have been led by global market weakness. At points when global markets appear to consolidate, India resumes de-coupling due to its differing growth profile.

However, we are unlikely to see total de-coupling because of an increasingly globalised world equity market. It is only when markets consolidate that investors try to identify potential for alpha opportunities; in times of negativity the alpha clearly comes from holding cash.While the debate on the de-coupling theory between the US and emerging markets can continue, one could arrive at a general consensus on one point. Although emerging markets may not be as fragile as a decade ago and economic growth in China and India is being supported by domestic consumption, a US recession will impact both countries to a certain degree.

OptiMix

January marked a tumultuous beginning for stocks in 2008, not just in India, but across the world. The reality of a US recession, that may be already underway, is no longer in doubt. What will now be closely watched is how deep and protracted such a recession will be. The effects will continue to be felt in the global economy and markets over the next few months The principal risks are a Chinese slowdown and earnings downgrades / negative earnings surprises.

How steep can the present decline go? At the intra-day low of about 15.3K on January 22, 2008, the Sensex was at a price-earnings multiple of 14.6 times and 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; India Inc has comfortably outpaced consensus in the past few years even after factoring the expected slowdown in GDP growth. From a fundamental perspective, we do not expect the downside to be deep from levels of about 15K. Large-caps are likely to lead the recovery.

Sundaram BNP Paribas Mutual

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