The Hindu Business Line : ‘Period of consolidation imminent’

The numbers (in the Budget) suggest that the Finance Minister is preparing for another year of 20 per cent plus growth in tax flows. Consensus estimate of earnings growth for India Inc is closer to 12-15 per cent range for FY 09, and unless there is a major boost to consumption, the aggressive growth that is implicit in the Budget numbers may prove to be a tough task. Infrastructure constraints and effects of global slowdown may not be neutralised by the boost provided for consumption and manufacturing. Benefits of rural spend may also take longer to manifest in ground-level growth numbers. The possibility of elections in the second half of 2008 stands enhanced and this may not be a bad course for the economy despite the closer-to-event uncertainty for the markets. No concrete indications are likely on this aspect or the nuclear deal till the Finance Bill is passed, as the government will wish to avoid a 1998-type outcome when the Budget was pushed to cold storage by withdrawal of support. The Budget does nothing to change our near-to-medium term outlook on the markets. Our cautious view on the markets, especially over the first half of 2008, remains intact.

News flow from the credit crisis and the emerging recession in the US has substantial headroom. The effects on the Indian economy may be muted given the largely domestic-led growth story, but markets are likely to remain vulnerable due to the impact on sentiment and liquidity.

A period of consolidation marked by movement in a narrow range and high volatility is imminent and may be healthy for the markets. The long-term India story is intact as is our faith in it. The growth momentum may pick up after a moderate decline in GDP growth in FY 09.

The Wise Investor, Sundaram BNP Paribas AMC

Muted action

While we view the Budget as being positive for local markets, the news from the international markets continues to be increasingly grim. In the US, the Federal Reserve rate cuts are not being passed onto the broader economy. Banks are not lending to corporates who do not have a premium credit rating. Credit spreads remain relatively high and the impact is likely to be felt in small and mid-cap companies. In fact, recent results are showing the problems of the financial and housing segments, now reverberating across sectors, particularly those related to consumer spending. The consumer is becoming increasingly cautious due to rising inflation, unemployment and falling home prices. In this environment, we are likely to see corporate profitability being impacted across 2008 as we enter a recessionary environment with rising inflation — the dreaded term referred to as stagflation.

In this weakening global environment, we are unlikely to see Indian markets operating above 17x on a P/E basis, particularly with 17 per cent earnings growth as consensus for the Sensex. That would mean it would be hard for markets to surpass levels of 18,000 for a significant period of time for the first half of 2008.

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