Sensex breaches the 21k mark yet again. But now what? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Sensex breaches the 21k mark yet again. But now what? 

A  A  A
In this issue:
» Rural India spends more on non-food expenditure
» What is worrying the IT majors?
» Labour market in US still sluggish
» S&P: Stress in banking system to worsen
» and more....

So... the BSE-Sensex once again crossed the 21,000 mark today. This, it has done after a period of almost three years. Since this 21,000 mark barrier for the Indian markets is psychologically crucial, we thought it would be a good idea to see how things are different by comparing the situation then and now.

Let's start with valuations. Back then, the index was trading at a price to earnings multiple of about 24 times its trailing twelve month earnings. Today, it stands at close to 18 times, which is a figure much closer to its long term average. In terms of price to book value, back in 2010 the index was valued at about 4 times. Today, it trades at a much lower figure of 2.8 times.

The front runners that have pulled the index up over the past few months have mainly been stocks from the information technology, pharmaceutical and FMCG spaces. Back in 2010, in addition to these three sectors, stocks from the power, metal, and capital goods played a role in the market spike.

The euphoria in 2010 was largely over India being decoupled from the world and continuing to grow healthily despite the stress across the globe. Today, the situation as you would be aware is quite different. Growth levels have been coming down and India continues to struggle with high inflation and interest rates. The financial health of a large number of companies has deteriorated. The uncertainties surrounding companies from the infrastructure and power sectors have only increased; with the same leading to hurting the balance sheets of banks.

Further, retail participation back in 2010 was close to half of the total turnover. This time around it stands at about one-third. As such, the influence of institutions has only increased over the past three years. High FII participation has been a commonality during both these periods. But this time around, FIIs seem to have played an even bigger role. As was reported by the Economic Times recently, the participation of FIIs in recent times stood at nearly half of the total turnover in markets.

Considering that the earnings trend has been mixed in recent times, with very selected sectors reporting good growth numbers, the overall sentiments seem to have become anything but optimistic. As such, one would not be entirely wrong in saying that liquidity - in the form of cheap money from the developed parts of the world - has been continuing to find its way to markets such as India. And this is pretty much what has driven the markets higher.

A key discussion that seems to be happening is whether breaching of this mark could be a possible sign of a bull market. Well... that may not be the case in our view.

Having said that, one thing seems to be certain. Stock picking in such an environment has become difficult; especially considering that the market currently is being driven by liquidity rather than fundamentals. While quality stocks continue to trade at historically high valuations, majority of the balance have been beaten down due to poor outlook and dull sentiments.

Do you believe that the Indian markets are poised for a rally given that the BSE-Sensex has crossed the psychological 21,000 mark? Let us know your comments or post them on our Facebook page / Google+ page

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01:40  Chart of the day
As and when people make more money, they begin to spend it on items that are not essential for basic survival. This seems to be happening in rural India currently. As per The Mint, there has been a structural change in rural demand over the past few years, with one such change being the growing importance of discretionary spending. If one sees the chart displayed below, it does indicate that spending on non-food items has now surpassed the spending that rural India does on food items. Items such as durable goods, entertainment, clothes, footwear, consumer services (such as telephone and repairing charges) are just some of the aspects that have increased over time. Given the strong monsoons this year, this trend is expected to widen in favour of the non-food expenditure. In view of the large size of the population that resides in rural parts of the country, this could be a huge market for companies targeting such customers. Even minor changes in percentage terms could throw up big opportunities in terms of value.

One point that however needs to be taken into consideration here is the role of schemes such as NREGA and the construction boom until a few years ago played a big role in terms of providing jobs to rural India, thereby allowing them to earn and supplement their traditional agricultural income.

Rural India's increasing discretionary power
Data Source: Mint

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The proposed US immigration bill that had given nightmares to the Indian IT industry is back on the table. As per The Mint, the Bill is back on the US government's radar. And the legislators apparently have a very narrow window to approve the provisions of the same. This will naturally get all the major IT players to worry. For if the Bill is passed in its current state, it will restrict the way these companies conduct their business. There would be a restriction on the issue of the H1B visas which are used by IT companies to deploy their employees on client site locations.

If the companies remove these employees from onsite locations, there would be a spike in costs. IT industry lobby NASSCOM has been lobbying hard for changes to be made to the Bill. But as of now, no one can say for sure if changes would be made or would the bill go through in the same restrictive form. If it does, then we could see margins for all IT players come under pressure. Especially for those who draw a higher proportion of revenues from the US.

FM Chidambaram is keen to assure investors that the Indian economy is at an inflection point. His claim that India's GDP growth is set to move upwards from current levels may or may not find takers. However, the sector that mirrors the fate of underlying economy is certainly expected to lie low for the time being. The NPA problems of Indian banks were as bad only during the 1992 crisis. At 3.4%, the gross NPAs in Indian banking sector are nearly decade high.

As per rating agency S&P, it is expected to jump higher to 4.4% by 2015. Moreover, S&P believes that rising corporate defaults is the key reason for the NPA stress in Indian banking. Most of the defaulting borrowers are those borrowing in excess of Rs 10 m. The potential of rise in interest rates is therefore like a sword hanging on the banking sector. It will not only increase the slippage rate in terms of corporate defaults but also lead to trading losses for Indian banks. We, however, believe that there are banks that can tide over the NPA problem and investors should stick to investing in those.

Still sluggish. Well, this is not a two-word comment about the Indian markets. They are definitely not sluggish in recent days. The phrase has instead been used by the Economist to describe the US jobs market. It highlights how the labour market in the US seems to be losing momentum yet again. We are not surprised though. Simply because the tools and means that are being used to produce more jobs in the world's largest economy are totally wrong. Just as one cannot aim to put out a fire by pouring more gasoline on it, a problem of money cannot be solved by providing more money. And this is exactly what the US Fed has been doing all these months.

Its US$ 85 bn a month bond buying program was intended to inject life back into the US jobs market. However, as we highlighted, this is not the solution to the problem. The real solution lies in taking the interest rates higher and allowing non-productive entities to fail. This will then free up resources that can then be used for real job creation. The economy will certainly have to bear the short term pain. But it will be a price well worth it given the long term benefits it will bring. Sadly, there's no one in the policy making department who's toeing this line. Instead, all they want is money printing to continue which will only drive the economy further down the wrong path we reckon.

An event earlier during this month shook Indian politicians and corporates alike. The CBI filed an FIR against Aditya Birla Group Chairman Kumar Mangalam Birla for alleged corruption in coal block allocation. The news created a furor among industry peers. Several came forward to rubbish CBI's allegations and vouched for Mr Birla's integrity. Now Assocham, an industry body has requested the Prime Minister to intervene. They have asked the PM to end the "environment of distrust" which was a result of "half-baked cases" against industry leaders. As per the Assocham, at a time when India was facing economic turmoil, this would further impede decision making and investments.

We believe these are very naive arguments. Should economic slowdown make us slack towards corruption cases? Should a person's reputation make him immune to investigation and trial? We are not at all jumping the gun and suggesting that Mr Birla is guilty. But we believe both the parties must get a fair trial. Such pressure tactics by industry bodies serve no greater purpose.

In the meanwhile, the Indian stock markets were trading around the neutral zone after starting the day on a firm note. At the time of writing, the benchmark BSE Sensex was down by 38 points (0.18%). Stocks from the capital goods and consumer durable sectors were in favour, those from the IT and power spaces were amongst the top underperformers. Most of the Asian equity markets were trading higher led by Japan and Singapore. The European markets opened on a positive note.

04:50  Today's investing mantra
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4 Responses to "Sensex breaches the 21k mark yet again. But now what?"


Oct 25, 2013




Oct 25, 2013

As it is rightly said that current rally is based on liquidity coming from developed economy rather than on fundamentals. Same will drive the sensex in future and for index to reach new high on sustainable basis ,Indian Government has to improve its governance standard otherwise fundamental will not improve and global liquidity will finds its place in different emerging market than in India...

Like (1)

R.Santhana Subramanian

Oct 24, 2013

Many a time during the sluggish season, we have seen the Sensex touching 21,000/- only to see a downfall immediately. Further even under such strained economy it is really incredible for such a high PE level of 18X. Investors are confused lot. It is certain that the level soon will down to touch a low ebb before Diwali Muhurat trading to again pick up by 1 to 2%. However long time investors in Mutual Funds remain still losers over a period of 4 to 5yrs. All theories of investment have shattered or collapsed. Any different line of school on present development?

Like (1)


Oct 24, 2013

sensex will touch 22220 by divali

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