Outlook turns sunny for Sensex

Outlook turns sunny for Sensex
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First Published: Fri, Jul 17 2009. 01 06 AM IST

The corporate results reported so far also indicate that the bottoming out of earnings growth may be behind us. Sandeep Bhatnagar / Mint
The corporate results reported so far also indicate that the bottoming out of earnings growth may be behind us. Sandeep Bhatnagar / Mint
Updated: Fri, Jul 17 2009. 01 06 AM IST
Mumbai: Indian equities may have taken a break on Thursday following a two-day rally that recouped losses after the Union Budget, but fund managers and analysts predict a sunny outlook as rosier corporate results for the quarter ended June emerge and the government tries to calm markets with reform-friendly statements.
On Thursday, the Sensex, India’s benchmark equity index, closed 0.02% down at 14,250 points. The broader Nifty 50 closed 0.05% down at 4,231.4 points. This comes after a two-day rally which saw the Sensex gain 6.34% and the Nifty 6.48%.
The corporate results reported so far also indicate that the bottoming out of earnings growth may be behind us. Sandeep Bhatnagar / Mint
“The early signs of a dawn are there,” said Ved Prakash Chaturvedi, managing director of Tata Asset Management Ltd, which has Rs21,222 crore of assets under management. “The results that are coming out are also not so bad. Also, global cues are turning around with news flows like Goldman and China. ”
Goldman Sachs, an American investment bank, reported an unexpectedly large $3.44 billion (Rs16,753 crore) profit for the quarter ended June. On Thursday, China, the world’s third largest economy, said its gross domestic product (GDP) accelerated a better than expected 7.9% for the same quarter, boosting hopes of an end to the economic slowdown. While early gains in Asian markets on Thursday were tempered by the slow opening in Europe, Japan’s Nikkei 225 index has gained 3.25% in the past three days while Hong Kong’s Hang Seng improved 6.48%.
The corporate results reported so far also indicate that the bottoming out of earnings growth may be behind us. For instance, Infosys Technologies Ltd, the bellwether technology services company, reported a 16% gain in net profits to Rs1,464 crore for the quarter ended June.
Larsen and Toubro Ltd, a big engineering company whose order books could well be used as a proxy for infrastructure development, said its profit after tax grew 15% during the quarter.
Recent government statements have also helped. Despite the pause in the rally today, market men believe that the negative reaction to the new Union Budget may well be over.
“The markets needed a sell-off after the Budget. It seems that is finished,” said Ramesh S. Damani, a member of the Bombay Stock Exchange. “The government has also been making the right noises. They have stressed on the GST (goods and services tax) and disinvestment.”
On Tuesday, in his reply to the Finance Bill, Union finance minister Pranab Mukherjee said that the economy was showing signs of a recovery and assuaged fears that the government would avoid second generation economic reforms such as disinvestment and fiscal correction.
All these factors have improved sentiment.
“Corporates’ confidence level is rising. If global growth comes back, we are likely to see improved outlook for earnings in the next few quarters. In an environment where interest rates remain low, equities look set to be an outperforming asset class,” said A. Balasubramanian, chief investment officer at Birla Sun Life Asset Management Co. Ltd. He manages some Rs56,282 crore of funds.
His view is supported by the Bank of America Merrill Lynch Global Fund Manager Survey for July. According to the report, “Amid reduced risk taking, investors are increasing, rather than scaling back, their allocations to emerging markets, at the expense of investment in Europe and the US. A net 48% of respondents say that emerging markets is the region they most want to be overweight, an increase of 11 percentage points from June’s survey.”
Foreign funds are one of the main investors in Indian equities. So far this year, they have invested at least $6 billion locally.
Valuations in India, while nearing long-term averages, are still considered “fair”, by analysts. According to Bloomberg data, the Sensex has a price to forward earnings multiple of 17.12. This compares with 16.15 for the Hong Kong’s Hang Seng Index and 24.26 for China’s Shanghai Composite. Price-earnings multiple is calculated by dividing the price of a stock by its per-share earnings. The higher the multiple, the costlier is the stock.
Since the beginning of the rally on 9 March, the Sensex has gained some 74.89%, the sharpest among major emerging market indices. In comparison, the Hang Seng rose 61% and the Shanghai Composite has improved 50%.
But most fund managers are reluctant to quantify the upside to valuations. For one, there is still little clarity on the monsoons, which are important to the farm sector that supports at least 60% of Indians. While the rains have picked up after a delayed start, their progress has been uneven.
“The rainfall trend during next week will be critical as most of the sowing for kharif (summer) crops is done by mid-July,” said a 13 July report from Morgan Stanley research. “Hence, we would like to wait for a week to get a clearer idea about the magnitude of the slowdown in agriculture growth.”
Ashwin Ramarathinam and N. Sundaresha Subramanian contributed to this story.
ravi.k@livemint.com
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First Published: Fri, Jul 17 2009. 01 06 AM IST