In a volatile week, when equities danced to the tunes of political uncertainties, soaring crude prices and surging inflation, bargain buying at the lower levels highlighted the point that valuations play a vital role in stock markets as many battered stocks bounced back sharply. The market is currently influenced by negative sentiments and valuations have taken a back seat, but this is a temporary phenomenon and once the negative sentiments subside, the valuations will be back in reckoning. However, till then wild movements such as the one witnessed last week may continue.
Difficult times: Stockbrokers at the Bombay Stock Exchange react to Sensex movements. Volatility in the market is expected to subside, with the political uncertainty on the nuclear deal probably over.
The inflation worries are far from over and going by the rising commodity prices, it seems the worst is yet to come. But, I think a lot of it is already factored in and the current values of the Sensex and the Nifty, the benchmark indices of the Bombay Stock Exchange and the National Stock Exchange, respectively, adequately reflect it. So I do not think that Fridays, when the data on inflation is released, would be as scary as they used to be for stock markets. Also, the forecast for 2008-09 gross domestic product (GDP) growth by various institutions—UBS (7.7%), Crisil (7.8%), Lehman Brothers (7.6%), HSBC (7%), JPMorgan (7%), Centre for Monitoring Indian Economy (CMIE) (9.5%), Moody’s Economy.com (7.6%), ABN AMRO Bank (7.5%), Reserve Bank of India (8-8.5%) and Macquarie Research (7%)—have factored in the the peak of inflation.
Moreover, according to the chief economic adviser to the finance ministry, Arvind Virmani, the government is not considering any revision of its growth estimate for fiscal 2008-09, which remains at 8-9%. He says, “I recognize that consumption could come down from the peak, (but) our projection of GDP growth of 8-9% factors this in.”
Going by the government’s estimate, the current valuations of the stocks certainly look very attractive. Even if the aggregate average of all GDP estimates is taken, the valuations still look attractive. The sharp growth in tax collections also suggests that the growth story of the Indian corporate sector is very much intact and that reasonably justifies the belief that valuation will be back in reckoning sooner than later.
Though soaring oil prices continue to loom large, India and the rest of the world seems to have adjusted to oil at $150 (Rs6,481) a barrel. Any rise in oil may still create some panic in the market, but it will be followed soon by bargain buying. However, if oil continues to move up unabated, then it may have severe negative impact on stock markets globally. In other words, as long as oil is consolidating with moderate upward bias, there is no reason to panic.