Feb 23, 2006|
Sensex @ 10,000+: Any party poopers?
The BSE-Sensex has finally hit the '10,000-mark'. As a matter of fact, it has comfortably managed to remain above this level, falling below it just twice - on the day it hit 10,000 and last Friday. The liquidity flow into India continues unabated, investors from countries like Japan, the UK, Denmark, Sweden and the US alike continue to warm up to the 'India story'. Corporate fundamentals remain on firm footing, GDP growth continues at an impressive pace - could anything be better?
Well, we, at the risk of being labeled as 'bearish', would just like to mention a few factors that could 'potentially' upset the apple cart. Please note, we remain positive on the 'India story' from a longer-term perspective, as we believe that major fundamental drivers, such as an expected increase in domestic consumption, a focus by the government on infrastructure development and the outsourcing story, all remain intact.
Interest rates and fund flows
With the new Fed Chairman, Mr. Ben Bernanke, taking office, it is widely expected that he will continue with an upward interest rate bias. The US Fed rate, at 4.5%, has seen the fourteenth consecutive hike since June 2004, when it hit multi-decade lows of 1%. Continued hikes will result in US assets becoming better yielding, with no currency risk to boot. Thus, it is possible that some money/funds will flow back to the US if this rate goes to a level that is 'perceived' to be safer by foreign investors. What this 'threshold level' is and what quantum of funds might flow out, is anyone's guess. What we are saying is that it could be a 'potential party spoiler'.
Global markets, including India, have been surprisingly resilient to crude oil price increases. Generally, any such increase is perceived as a 'tax on growth', which the economy has to bear, given the fact that 'black gold' is an essential commodity to keep the engines of the economy running. However, this time around, there has been no impact whatsoever. This can be explained by the fact that globally, stocks, real estate and commodities have all hit multi-year highs, causing a 'wealth-effect'. This has been possible due to an increase in global liquidity, caused by accommodative monetary policies of central banks worldwide. Commodity guru, Jim Rogers, has said that over a period of time, he expects crude prices to hit US$ 150 a barrel. If this happens, it could seriously restrict global economy growth, including India.
This is a linked chain that determines in a big way as to where the markets will go in the long term. Valuations, at present, may not be that attractive to a 'value investor'. With the BSE Sensex trading at 18.7 times trailing 12-month earnings, it certainly does not appear too cheap at current levels. This is also a reflection of the market's expectations from India Inc. Good earnings growth has already been factored in at the current levels and any hiccups on this front could result in some correction and a re-alignment of expectations from the markets.
India Inc will now need to deliver on the earnings front in order to justify current valuations. This is the main fundamental factor that is expected to determine the movement of the indices over the longer-term. At these levels, high earnings expectations have already been built into stocks on a macro basis and if they do not deliver, some amount of profit booking would be in order.
However, we would like to additionally stress here that '10,000' is just a level and nothing else. For longer-term investors, it really does not mean a great deal, apart from the 'psychological impact'. These days, often, it is difficult to say whether one is watching the Sensex or the Dow Jones! But for such longer-term investors, it is more a stock-specific approach that is important and whether or not the individual stocks have breached their target price or not. It is such an investing strategy that one should follow in times like this.
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