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Sensex so far: what goes up must come down?

Sensex so far: what goes up must come down?
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First Published: Sat, Mar 08 2008. 12 44 AM IST

Updated: Sat, Mar 08 2008. 12 44 AM IST
Mumbai: Soaring returns from India’s bellwether equity index, the Sensex, made it the toast of global investors in recent years. These days, investors betting on the same Bombay Stock Exchange’s index are being toasted.
The Sensex has lost at least 21% so far in 2008 alone, the biggest loser among major Asian indices. This compares to gains of at least 45% in both 2006 and 2007.
However, even after a dismal start, the average price-earnings multiple of Sensex stocks is at a high 21.58, the second highest in Asia behind China. The P-E of China’s benchmark index, which is down 18.27%, is pegged at 36.03.
While this could portend more pain for investors, some analysts are starting to say current price levels are attractive.
“Indian stocks are more attractive after the fall, (given) their earnings potential,” says John Levack, the Hong Kong-based managing director of Electra Partners Asia Ltd, the Asian arm of a large UK-based private equity firm.
This is after Friday, when the Sensex led Asian markets on their way down, falling 3.4% as investor sentiments across the region dropped in sync with the US markets which were rattled by a disclosure by the Federal Reserve that the value of American homes has dropped with homeowners’ debt exceeding equity for the first time in six decades, pointing to more foreclosures.
The Sensex fell 566.56 points to close at 15,975.52, the biggest weekly decline in 21 months. The National Stock Exchange’s broader 50-stock Nifty index closed at 4771.30, down 149 points or 3%.
Late Friday night, and ahead of Friday morning trading on the US stock market, the US Fed said it was taking bigger steps to ease the US’ credit crisis, including increasing the amount of money it will auction to banks in March to $100 billion. The Fed had started a new type of auctions in December to provide short-term loans to cash-strapped banks. The Fed also said it was in “close consultation” with other central banks.
The Fed is also trying to contain the fallout on the broader US economy, which is moving closer to a recession.
Meanwhile, data showed that American employers slashed jobs by 63,000 in February, the most in five years. The US labor department said Friday that unemployment rate in the US dipped to 4.8% as hundreds of thousands—perhaps discouraged by their prospects—left the civilian labour force. Job losses were widespread. The US markets were all down Friday morning on the unexpected drop in payrolls.
“Given what we have seen in terms of illiquidity in the financial markets in the last four or five days, this came right in time,” Ajay Rajadhyaksha, head of fixed-income strategy at Barclays Capital in New York, said in an interview with Bloomberg Television.
Earlier, the Sensex slumped 9.1% for the week, its steepest fall since May 2006, with 27 out of its 30 stocks falling. All 13 industry indexes on the exchange dropped by between 1.1% and 6.6% and eight stocks fell for each that rose.
Other key Asian markets lost between 3.2% and 1.3% and most European markets were also lower. The cues came from the US where Dow Jones Industrial Average closed 1.75% lower and the broader S&P 500 dropped 2.2% on Thursday.
“The total credit-related write-offs in US will reach $1 trillion,” predicts CLSA Asia Pac’s equity strategist Christopher Wood in a report. At least $500 billion of the write-offs will stem from residential mortgage-related losses and the rest from other areas of dodgy credit, he said.
The only index that has dropped more than Sensex in Asia is the relatively tiny Ho Chi Minh index of Vietnam, which is down 28%. The Vietnamese stocks have a total market capitalization of around $15.5 billion, compared with the Indian equity market’s $1.3 trillion.
“(When) compared with other (Asian) markets, more money had come to India last year,” explains Jon Thorn, who manages the India Capital Fund of US-based India Capital Management Ltd, a foreign institutional investor (FII), suggesting why more money headed out in tough times.
FIIs have sold some $3.14 billion worth of Indian stocks since the beginning of this year. Foreign funds had invested about $17.2 billion in 2007, the biggest ever annual inflow in to Indian markets. In 2006, FIIs were net buyers of $7.9 billion in Indian markets.
Some analysts and fund managers suggest that while Indian stock valuations are attractive now, global cues will continue to drive the Sensex and other Asian indices. Still, Rob Subbaraman, the chief economist for Asia (outside Japan) of US-based investment bank Lehman Brothers, in a report on Friday, noted that “US recession or not, the structural drivers of India’s rising potential growth remain intact.”
The next big event awaited by global equity markets, said analysts, is the US Fed meeting on 18 March, where the policymaker is expected to announce another interest rate cut.
Among Asian markets,Hong Kong’s Hang Seng index has dropped 16.5%, while South Korea’s Kospi and Singapore’s Strait Times have fallen 11.6% each this year. Japan’s Nikkei has fallen 5.7%.
(Ashwin Ramarathinam of Mint, Bloomberg and Associated Press contributed tothis story.)
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First Published: Sat, Mar 08 2008. 12 44 AM IST
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