Aug 4, 2004|
Markets: Louder alarm bells?
A couple of weeks back we had written an article 'Monsoons: Alarm bells?' which showed the criticality of monsoons in the growth of Indian economy. Today, the alarm bells seem to have only got louder and are emanating from other countries as well. Of course, for them the reason is not monsoons. However, it must be noted that in the event of any other adverse global development, the warning signs of which are already traversing across the globe, India and its capital markets would be affected. Nonetheless, in the month of July, Indian stock markets seem to have managed to buck the negative trend, which prevailed largely across the globe (see chart below).
As can be seen in the chart above, Indian stock markets have gained nearly 8% previous month, clearly outperforming other major indices across the globe. The primary reason for the lacklustre performance of equities the world over has been the high crude prices, which yesterday breached the US$ 44 per barrel mark to record highs. This was on the back of continuing concerns with respect to the possibility of terrorist attacks and the ongoing Russian oil crisis (pertaining to oil major Yukos), both of which have the potential to imbalance the demand-supply situation. The concerns arising due to this is the impending impact on corporate profits, as higher crude prices would fuel inflation, which in turn would push interest rates higher (probably sooner and higher than expected). The recent security alerts issued by the US government, with respect to possible terrorist attacks by on iconic financial institutions including the NYSE, IMF and Citigroup, would only further add to the already grave situation of depressed investor sentiments.
The effect of higher crude prices has already been witnessed in the June quarter slowdown of US GDP growth. This could be attributed to the weak US consumer spending growth in the recent past. However, when compared on a YoY basis, consumer spending is still more or less stable. It must be noted that the effect of US economy slowdown would be felt across the world, as the US is a huge importer of goods from across the globe and thus the dependence of other countries on the US for growth. This has led to the wave of profit booking across regions during the month of July.
However, the Indian market was amongst the very few indices to have actually gained during the month. The one big positive factor for India stock markets were the better than expected results by corporate India, which has made valuations relatively much attractive as compared to many major emerging economies. Just to put things in perspective, of the 350 companies under the Quantum (equitymaster) universe, the data culled out of 250 companies shows that their consolidated bottomline during the June 2004 quarter has witnessed a 30% YoY rise! This more than justifies the rise of the Indian indices during the previous month.
However, now what for India? With monsoons being below normal in the season so far and institutions and organisations across the country downgrading India's growth target to closer to 6%, where are the Indian stock markets headed? Well, we really would not want to comment on where the Sensex is headed over the next one-week or one-month, as we believe that it is rather impossible to do so, but we continue to believe that at 10x to 11x FY06 earnings at the current juncture (compared to a past average of 15x-16x), there still remains room for upside. Nonetheless we do reckon that all the above-mentioned concerns (including monsoons in the case of India) are detrimental to the growth of the country, which could raise hiccups in India's growth path owing to the fact that India is now more globalised than ever before. However, at the same time it must be noted that the emergence of a huge consuming power in the form of China, has helped the Asian region (including India) insulate itself from the volatility witnessed in the western countries. Thus, our call is, despite the near-term concerns, stay invested but think long-term.
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