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Mint update| Market bottom still ahead

Mint update| Market bottom still ahead
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First Published: Wed, Feb 23 2011. 03 02 PM IST

Updated: Wed, Feb 23 2011. 03 02 PM IST
There’s an old axiom that says markets revert to the mean. The folks at Ambit Capital Pvt Ltd have applied this maxim to Indian stocks and concluded that the worst is yet to come.
Here’s what Saurabh Mukherjea, head of research at Ambit and his colleagues wrote: Historical precedents suggest that the ongoing India de-rating process is not yet Complete. India trades at just a shade below its long term PE despite near-term macroeconomic headwinds. Also, in comparison to the broader EM pack India continues to trade at a premium (on forward PE) despite the policy-paralysis and the higher domestic inflation.
High inflation and high inflation expectations means that most economists are expecting at least 100 bps rate hikes in the next twelve months. Ambit says that is another bit of proof that things are going to worsen.
Take a look at this graphic.
Higher inflation also means a squeeze on company profit margins, lower EPS and assorted ills.
The triple blow that high inflation imposes will be a meaningful headwind over the next 2-3 quarters given that these cost heads together account for more than 70% of BSE500 net sales.
Further,
History suggests that India trades at a discount to other EMs for a prolonged period when GDP growth is weak (April 2001 –December 2005) or when inflation is high (the coming two quarters) or both (July 2008-June 2009) thus suggesting that the derating process in not complete
In other words, if you are one of those happy-go-lucky people who believe in timing the markets, hold your horses. You ain’t seen anything yet.
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First Published: Wed, Feb 23 2011. 03 02 PM IST
More Topics: Markets Update | Sreeram | BSE | Sensex | Ambit Capital |