Sensex’s rise baffles fund managers and analysts

Sensex’s rise baffles fund managers and analysts
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First Published: Thu, Apr 16 2009. 12 55 AM IST

 Standing tall: The Bombay Stock Exchange’s benchmark index gained 317.51 points, or 2.9%, to close at 11,284.73 on Wednesday. Ashesh Shah / Mint
Standing tall: The Bombay Stock Exchange’s benchmark index gained 317.51 points, or 2.9%, to close at 11,284.73 on Wednesday. Ashesh Shah / Mint
Updated: Thu, Apr 16 2009. 12 55 AM IST
Mumbai: The Indian equity market rose for the eighth straight day on Wednesday, the first time since September 2007, even as the turnover crossed Rs95,000 crore, driven by large-scale institutional buying. The last time such a surge in volume was seen was in the last week of September 2008, when shares worth Rs1 trillion changed hands and the Sensex, the benchmark equity index of the Bombay Stock Exchange, was at 13,547.18.
Standing tall: The Bombay Stock Exchange’s benchmark index gained 317.51 points, or 2.9%, to close at 11,284.73 on Wednesday. Ashesh Shah / Mint
On Wednesday, the 30-share Sensex gained 317.51 points, or 2.9%, to close at 11,284.73 and the broad-based 50-stock Nifty index of the National Stock Exchange closed 101.55 points up, or 3%, at 3,484.15, shrugging off the disappointing earnings guidance by Infosys Technologies Ltd, the bellwether information technology company. It projected a revenue dip of at least 3.1% for the current fiscal year.
“It’s shocking. Stocks are being bought with frenzy and the feeling is if you don’t buy today, you will miss the opportunity—something that we had seen in end-2007, when the Sensex was heading towards its historic high, before the crash,” said the head of a Mumbai-based foreign brokerage firm, who did not want to be identified. He couldn’t say whether the worst is over for Indian equities.
Many fund managers and heads of local and foreign brokerages are grappling with the “mystery” of the so-called irrational exuberance that has gripped the Indian market since 9 March, when the current bear market rally started. In the past five weeks, the US’ Dow Jones Industrial Average has gained nearly 21% and Japan’s Nikkei index 23.4%, but India’s rise has been the sharpest among the world’s major stock markets—38.29%.
“It would be a good time to buy on weakness,” said Chetan Parikh, a value investor, who heads Jeetay Investments Pvt. Ltd, a wealth manager. “While valuations are not exactly cheap, neither are they expensive. There are many stocks which are still being quoted below book value.”
Book value of a share is a ratio that is calculated by dividing the equity and reserves of a firm by the total number of outstanding shares.
Indeed, foreign institutional investors (FIIs) and domestic mutual funds and insurance firms, who were sitting on cash piles of as large as 30% of total equity assets under management in the beginning of fiscal 2010, are powering the rally. FIIs have bought stocks worth $1.18 billion (Rs5,900 crore today) since 9 March, when the present rally started. Mutual funds and insurers pumped in some Rs2,449.68 crore during this period, on lower valuations and positive news flow, tracking global markets.
“We have invested,” said Satish Ramanathan, who is head of equities at Sundaram BNP Paribas Asset Management Co. Ltd, which has Rs9,267 crore assets under management.
Ramanthan said that his cash levels have come down to less than 10% of total equity assets, compared with 30% a month ago.
Another fund house UTI Asset Management Co. Ltd, which manages some Rs48,754 crore, said its cash levels have come down to 15%, from 20% of total assets under management during this rally.
Analysts said that valuations, as measured by the price-earning (P-E) multiple, of the Sensex were as cheap as nine times after the benchmark index tumbled 52% in 2008. P-E multiple is calculated by dividing the price of a stock by per-share earning. The higher the P-E multiple, the costlier is the stock.
After the current rally, valuations are around 11.62 times forward earnings or estimated earnings of the current fiscal year, according to Bloomberg data, still off the highs of 28 times in January 2008 at the peak of the bull market.
To be sure, there has been a stream of positive global and domestic news. “Railways’ freight rates have started inching up; real estate prices have crashed and sales have begun, and FMCG (fast moving consumer goods such as soaps and shampoos) sales are still robust in tier II and tier III cities,” said a recent strategy report from IDFC-SSKI Securities Ltd. “These indicators point to a slow restoration of normalcy.”
But fund managers aren’t sure whether the rally would be sustainable. For one, elections to send delegates to India’s Parliament start on Thursday and a new government would be in place by the end of May. A hung Parliament could lead to political parties of conflicting economic ideologies come together to form a new government, which might find it difficult to fight the slowdown.
Secondly, while economic growth will be muted, company earnings are unlikely to recover fast. The Index of Industrial Production, which measures the country’s industrial output, fell at its fastest annualized rate in 14 years in February. Exports have fallen for five straight months.
“We are cautious,” said Anoop Bhaskar, head of equity at UTI Mutual Fund. “Analysts are still not upgrading (company earning) numbers. This rally is largely momentum driven.”
“Some stocks have got ahead of the fundamentals,” said Ramanathan of Sundaram.
Ashwin Ramarathinam contributed to this story.
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First Published: Thu, Apr 16 2009. 12 55 AM IST