Market may try to stage a comeback

Indian benchmarks, trading near 18-month low, may attempt to rebound this week, which will have truncated trading session due to Ramzan (August 31) and Ganesh Chaturthi (September 1). The stock markets are likely to see low-level participation but volatility is likely to remain high.

Despite Mr Ben Bernanke, the US Federal Reserve Chairman, on Friday crashing hopes that the Fed will resume its quantitative easing programme, there could be some gains as stocks are in the oversold zone. The Fed's decision would help in cooling down commodity prices, which will bode well for India as the country is already suffering from higher inflation.

Another soothing factor came from the weather God. The rainfall deficit in the country had widened to 5 per cent of the long-term average in July 2011, but a pickup in August helped narrow the deficit to 1 per cent. Good rains could help boost rural income and may help bring down food inflation.

However, in the short- to medium-term, the domestic market is likely to continue in the bearish phase as problems are arise from all corners, more so from the domestic front.

The Centre has to get its act together to overcome this difficult period. It has been perceived that the Government is inactive in policy-making, particularly with the graft-related investigations and a nationwide debate on setting up of independent Lokpal having gripped the Centre's attention.

The time has come to take some strong action on long-pending policy issues such as environmental approvals, Land Acquisition Bill, reforming the State electricity boards, introduction of Goods and Services Tax (GST) system. The RBI wants the Government to implement the Direct Taxes Code and GST without any delay for a more enduring fiscal consolidation strategy that focuses on expenditure compression by restraining subsidies.

“If some of these measures are implemented over the next six months, corporate confidence should begin to revive — although we believe that major revival of investment is unlikely in the next three quarters,” said Morgan Stanley research report.

Losing premium

Many Street intellectuals are of the opinion that the premium enjoyed by Indian benchmarks vis-à-vis emerging markets may fade away in the short term due to the global slowdown.

“Given that the US is entering a multi-year economic slowdown, equity markets in that part of the world, and hence Indian equity markets, are likely to continue sliding. As consensus continues its journey to our EPS estimate for the Sensex (Rs 1,159 in FY-12) and to our GDP growth forecast (7.1 per cent Y-o-Y in FY-12), we believe that the Sensex is likely to head towards 14,500 – a price level where India's premium to EMs will be in line with its long-term average,” said Ambit in its research report.

CLSA, which revised the year-end Sensex target downwards to 18,200, said: “While the sharp correction in the market may suggest attractive valuations, we note that the pace of corporate earnings downgrades has intensified in the recent results season.”

According to Nomura, “Market valuations are looking particularly attractive at current levels — the Sensex earnings multiple at 12.6x 12-month consensus-based forward earnings is trading at a 21 per cent discount to its five-year average of 16x, which we think is already pricing in significant risk to earnings. We believe that the risk/reward trade-off would turn even more favourable when rates are on the decline.”

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