Mumbai: The Sensex, the Bombay Stock Exchange’s benchmark market index, took 98 trading sessions to attain a new high, closing at 14,664.26 points on Monday, but analysts at brokerages and fund houses said that it wasn’t likely that the index would rise significantly from this level because valuations look expensive. At this level, the Sensex is 18% higher than the level at which it traded four months back in the first week of March.
“All the macro-economic indicators indicate a bullish scenario, but if we take the stock markets into account, valuations certainly look stretched,” says Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services. “The slowdown in credit growth and the fall in the production by automobile companies suggest that we are getting into a soft-landing scenario,” says Ridham Desai, managing director, Morgan Stanley Investment Managers. Last week, Big Bull Rakesh Jhunjhunwala had also expressed his concern over the short-term direction of the market.
Analysts are worried on a number of counts.
The central bank’s move to fight inflation by increasing interest rates has started showing results.
Automobile companies are talking of cutting down production and the real estate sector is showing signs of a slump in housing demand. And the appreciation of the local currency against the US dollar is set to impact the earnings of software companies, which derive a major portion of the revenues in US dollar.
Besides these factors, which are local to India, there are concerns being raised on the outlook for emerging markets. Jim Rogers, who predicted the start of the global commodities rally in 1999, said in an interview to Bloomberg in Singapore that he has sold out of all emerging markets with the exception of China because they’re “over-exploited” (see story on page 15).
The Morgan Stanley Capital International (MSCI) Emerging Markets Index has risen 17% in 2007, twice as fast as the MSCI World Index of developed economies, as investors bet sustained globaleconomic growth willbolster profits.
Among the emerging markets of Asia, over the past month, India has been an under-performer: the MSCI India Index has returned 0.48%, compared with an average 5.74% return for the MSCI Asia Emerging Markets Index.However, over the three-month (April-June) period,India has outperformed other emerging markets with 20.38% returns against an average 17.3% return for the MSCI Asia Emerging Markets Index.
“Our emerging market strategists’ foresee a correction in emerging markets in the near term. As per our estimates, India is still trading at a 35% premium to other emerging markets. As we have seen in the past, during bullish phases, India tends to gain more than the other markets and during the correction phases, it tends to fall more. We may see a similar situation now also,” says Desai of Morgan Stanley.
However, not all fund managers are bearish. “The slowdown in growth of certain sectors doesn’t mean a slowdown in the growth of Indian companies in general. IT services companies aren’t seeing a slowdown in demand per se. Secondly, sectors like telecom, capital goods and media, which are not affected by rise in interest rates, are likely to show up good performance,” says Nandita Parker Agarwal, Principal, Karma Capital Management LLC, a boutique investment firm managing India-dedicated offshore funds.
According to her, globally, fund managers have been underweight on India for sometime now and “they are looking forward to buy Indian equities on a correction”.
However, Agarwal says that the bigger risk to the Indian market is the change in the global liquidity and the global risk perception. “If global investors start moving away from riskier asset classes, then India would certainly be affected,” she adds.
Meanwhile, retail investors continue to watch the Sensex level, with some treating it as an academic exercise.
“It’s always exciting to know that the Sensex has reached a new level. But it doesn’t make much difference until I get to know that the stocks I own have gone up or not,” says Ketan Dalal, a 43-year-old investor from Mumbai, who kept a close eye on the ticker throughout the trading session on Monday.