New Delhi: Indian stocks could see another round of correction in early 2009, though lower valuations and economic fundamentals should lend support later, a fund manager at Principal Asset Management said.
The country’s shares ended their worst ever year, losing at least half their value, battered by a global crisis which led foreign funds to sell shares and take the money home and a slowdown locally which took its toll on domestic demand.
Dip in market: Workers at a brokerage in Mumbai. BSE’s benchmark Sensex index has recovered about one-fourth of lost value since October. Rajanish Kakade / AP
“There could be a correction in January because the markets have rallied in November and December...a 10% correction is possible,” Binay Chandgothia, who helps manage $1.5 billion (Rs7,305 crore) in assets as chief investment officer at Principal’s Hong Kong operations, said over the phone.
“But after that you should see markets consolidating and people will start looking at equities on a more serious note,” he said, adding that investors would use the next fall as an opportunity for adding positions.
The Bombay Stock Exchange’s benchmark Sensex index slid 52.4% in 2008, its first annual decline since 2001. But the market has recovered at least one-fourth of its lost value after hitting an almost three-year low in October.
“On a fundamental basis, the valuations are fairly reasonable, with India trading at about 10 times FY09 earnings,” said Chandgothia. At its peak last year, the index was trading in excess of 20 times forward earnings.
Besides the crisis, double-digit inflation, seven-year high interest rates and soaring commodity prices also weighed on the stocks, leading economists to cut their growth estimates to 7% from an average 9% in the last three years.
But inflation has since slowed, rates cut and commodity prices corrected in recent months, lifting sentiment.
“Some of the problems which were affecting India earlier...they have turned down in recent months rather sharply, putting India in a relatively better position,” Chandgothia said.
“As some of the risks that we saw in 2008 are on their way out, as the world economy comes out of recession, you might see an appetite again from global investors for a secular story like India and capital being reallocated” to theSouth Asian market.
But large inflows would have to wait till elections due by May.
Foreign investors pulled out about $13 billion from Indian stocks in 2008, almost reversing their record net buy of $17.4 billion in the previous year.
“Political risk is going to be there...that is something which can actually come in the way of any large inflows to India till such time as the political scene gets clearer post elections.”
Chandgothia said Principal had some Indian telecoms stocks in its portfolio and would continue to keep them as the firms offered good earnings visibility and maintained subscriber additions pace.
He said infrastructure players were down but not out, even as the government would be constrained to spend more on building roads, ports and special economic zones because of the worsening fiscal situation.