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Sensex saga | Below 13,000 but still not too cheap

Sensex saga | Below 13,000 but still not too cheap
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First Published: Wed, Jul 02 2008. 12 27 AM IST

Updated: Wed, Jul 02 2008. 12 27 AM IST
Mumbai: India’s bellwether equity index Sensex sank below the 13,000 level on Tuesday, its lowest since 5 April 2007, to close at 12,961.68, losing 3.7%, or about 500 points, as funds continued to sell stocks, spooked by rising oil prices, accelerating inflation, higher interest rates and political uncertainties.
At the National Stock Exchange, the broader 50-stock Nifty basket too fell below the 4,000-mark, long seen as a significant support level, for the first time in 2008.
The bearishness spilled over to the currency market as well, pulling down the rupee to an intra-day low of 43.45 to one US dollar as high crude prices pushed importers to cover their position.
The Sensex is now down about 36% since the beginning of 2008 with few market observers willing to call it a bottom yet.
India’s peer market in the region, China, has seen a 50% erosion in its equity index this year with that market’s price-earnings (P-E) multiples around 20, down from 60 early this year.
There has been a sharp drop in P-E multiples of Sensex as well. According to a Bloomberg estimate, the Sensex P-E is now 13.34 times, down from 28.5 times in January when it was at an eight-year high as the index itself hit a record.
Still, Indian stocks are not cheap compared with other Asian markets. For instance, Singapore’s Straits Times is trading at 10.5 times its earning, Taiwan 12.7 times, Hong Kong 12.8 times and South Korea 12.9 times.
The P-E multiples indicate growth outlook and investor’s return expectations from an index.
Historically, the recent low of Sensex, in terms of PE multiples, was back in 1998, after the US imposed sanctions on India after the Pokhran nuclear tests. The Sensex was trading around 2,800 and its P-E multiple was 9.83 times.
However, in less than two years, the P-E multiples of Sensex shot up to 28.57 by mid-2000, as it rallied to 4,600 levels. By September 2001, the index crashed by some 43% to drop to 2,600.
Even though the market seems to be in a firm bear grip, some analysts claim they are starting to see opportunities for “value picking”.
Abhay Aima, the head of private banking and wealth management at HDFC Bank Ltd, says there is “excess” (selling) in this market and “momentum is pushing it down” though fundamentals do not justify further declines.
Other analysts and some fund managers claim there could be a relief rally soon from this oversold state as the index has lost some 17.4% in the last 10 trading sessions and more than 21% in the past one month.
“The potential for an upside rally is high,” claims Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership LLP (DSP), a global fund manager registered as foreign institutional investor (FII) in India.
However, there could be more capital outflow from India, he added.
FIIs have net sold $6.5 billion (Rs28,145 crore) this year, little less than one-third of inflow last year.
“With oil still looking stronger rather than weaker, the odds of decisive break lower (for Sensex) continue to grow,” said Christopher Wood, equity strategist for brokerage firm CLSA Asia Pac, in a report on Tuesday.
A recent fund manager survey by CLSA reveals 57% of non-India dedicated funds are underweight on India’s stocks.
Apart from double-digit inflation, rising trade deficit is also a major concern, according to economists.
“At this rate, the country is heading for a triple-digit trade deficit in calendar 2008—equivalent to about 10% of GDP,” said Robert Prior-Wandesforde, Indian economist for The Hong Kong and Shanghai Banking Corp.
Oil prices are the key risk to India’s balance of payments surplus this year, according to Sonal Varma, India economist for Lehman Brothers. “Further increases in oil prices can easily tip this balance.”
According to foreign exchange dealers, the Reserve Bank of India (RBI), which has been aggressively intervening in the market to prevent rupee from crossing 43 a dollar, stayed away from the market on Tuesday. Importers who were waiting for a stronger rupee rushed to the market on Tuesday to buy dollars as they started fearing that the local currency will not strengthen from this level. Their demand pushed the currency down.
According to dealers, RBI cannot hold on to its ground anymore and has to let the rupee depreciate further. “An increased intervention would mean tighter liquidity situation,” said a foreign exchange dealer with a foreign bank who did not wish to be named.
The tightness of liquidity can be gauged from the interbank call money rates which are now ruling at 8.50-8.60%.
“Beyond a point, RBI cannot come into the picture and intervene. It has to let loose its rein because the problem in the market is now shortage of liquidity,” said R.V.S Sridhar, senior vice-president, treasury, Axis Bank Ltd. If RBI sells dollars to protect the local currency, it will have to suck out rupees from the system, which would further tighten the liquidity.
Foreign exchange dealers, who were seeing the rupee touching 42.50 levels after the central bank hiked its policy rate as well as banks’ cash reserve kept with RBI by 50 basis points each on 24 June, are now less optimistic.
“Our first assumption was 43.50 a dollar. Now, that level is close and it’s possible that within the next month or so, the rupee could touch 44.10 a dollar,” said V. Rajagopal, chief foreign exchange dealer at Kotak Mahindra Bank Ltd. “We see rupee heading towards 44 a dollar in about one or two months,” said Sridhar of Axis.
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First Published: Wed, Jul 02 2008. 12 27 AM IST
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