Mumbai: A late afternoon sell-off on Tuesday took Indian equity indices to their lowest level since November 2005 and also drove down the rupee to its lowest level ever against the US dollar.
The equity indices tumbled as European and US markets remained weak and new troubles at insurance firm American International Group Inc. rustled up fears about a fresh round of financial instability. The benchmark 30-share Sensex closed at 8,427.29, down 2.09%.
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The last time the index closed at around these levels was on 10 November 2005, when strong economic growth was powering a sustained rise in corporate earnings. A weakening economy, anaemic earnings growth and uncertainty arising from the national elections that will begin next month will weigh down on Indian equities, said most analysts and fund managers Mint spoke to.
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Stocks may seem cheap right now when valued by their price-earnings, or P-E multiples, a standard metric used by investors. The average P-E multiple of the 30 stocks that make up the Sensex is now 11.92, close to historical lows and far below the 28.44 that it touched when the Indian stock market peaked on 11 January 2008. The Sensex P-E was 16.24 in November 2005.
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Yet, analysts warn that too much should not be read into the low P-E levels. “The current P-E levels are totally illusory. Earnings are going to come down and this will drive the P-E up,” said Ramesh S. Damani, a member of the Bombay Stock Exchange. “The market has broken an old bottom. It is probably lagging other global markets which have all dropped to new lows. This reflects the uncertainty and turmoil (in financial markets) across the world,” said Damani.
The heavy selling seen in the stock market also pulled down the rupee for the seventh day in a row, to a record 51.98 to a US dollar. The Indian currency has been under pressure ever since credit rating agency Standard & Poor’s said on 24 February that India was now just one step away from dipping below investment grade. The rupee has been testing new lows since the end of February.
A weak rupee, in turn, could be hurting the confidence of foreign equity investors, creating a vicious circle of risk aversion. “The currency market signifies a lack of confidence. It is leading to reverberations across the system,” said Vetri Subramanian, head of equity, Religare Aegon Asset Management Co. Ltd.
“The slide in the rupee will only encourage further selling by FIIs (foreign institutional investors),” said domestic brokerage India Infoline Ltd, in its client report on Tuesday.
Sailesh Jha, senior regional economist at Barclays Capital, an arm of Barclays Bank Plc., revised the three-month house forecast of the rupee’s value against the dollar from 52 to 56.
“Growth in domestic credit to the industrial and services sectors is unlikely to be able to offset the sharp fall in investment financing from abroad,” says analysts at Credit Suisse in their latest India strategy report.
With the schedule of the Lok Sabha polls announced, brokers expect few fresh feel-good measures by the current government. “Therefore, all eyes will be on RBI (Reserve Bank of India) to unveil fresh doses of monetary stimulus,” the Infoline report said.
In their latest India strategy report, Morgan Stanley analysts Chetan Ahya and Ridham Desai say that cyclical global factors—global risk appetite, which in turn reflects in the trend for capital inflows into India, and external demand —have a very important role in driving India’s growth cycle.
According to them, a recovery in earnings may not trigger a new up-cycle for Indian stock markets. “In 2002, the economy and earnings started to recover by the middle of that year, but the markets only bottomed out in April 2003,” the Morgan Stanley report said.
Fund managers in India too are not so optimistic. Religare mutual fund’s Subramanian believes that there could be further downside to market if earnings estimates get further slashed.
“The situation (in stock markets) will become more aggravated as we move closer to the election,” says Ved Prakash Chaturvedi, chief executive of Tata Asset Management Co. Ltd. He expects another 5% downside to the markets from current levels.
Graphic by Sandeep Bhatnagar / Mint