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Looking beyond obvious - Views on News from Equitymaster
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  • Aug 6, 2002

    Looking beyond obvious

    One of the key factors apart from monsoons and slow pace divestment that is affecting sentiment in the markets is the issue of weakness in the US markets. It has been often argued that Indian markets tend to mirror international markets, notably US.

    We try to figure out whether the argument holds ground. We make an effort to interpret the performance of the domestic indices viz. BSE Sensex and NSE Nifty against the Dow and NASDAQ since September 2001 when terrorists attacked the World Trade Centre. Since September 10th 2001, both the benchmark US indices have declined by 13.5% and 24.5%, as evidenced from the table below. The NASDAQ, as expected, has fallen at a faster clip primarily on account of continued profit warnings from technology majors (NASDAQ primarily comprise of only tech stocks). The after-effects of closure of dotcoms and reduction in technology spending are clearly reflected in the profitability in the likes of Cisco and IBM. After the Enron saga, investor confidence has been shaken to the core and successive events like WorldCom and Tyco have not done anything to improve confidence in the system. As a result, since September 2001, US markets have under performed when compared with Indian markets.

    India pitted against US…
    (% change) Dow Nasdaq BSE NSE
    Since Sep 10th 2001 -13.5% -24.5% -7.0% -7.8%
    Since Jan'02 -17.5% -35.3% -11.8% -11.0%
    Since Apr'02 -19.8% -31.3% -15.1% -15.0%
    Since July'02 -8.7% -12.5% -9.5% -10.6%

    On the other hand, BSE Sensex has declined only by 7.0% since September 2001 with NSE Nifty down by 7.8%. What is more interesting to note is that the NSE was actually in positive zone for the period between January-April 2002. However, post-selling pressure from one of the top mutual funds in the country in light of shortfall in certain monthly income plans and concerns of poor monsoons, markets have tumbled in the last one-month. Since July 2002, the BSE Sensex and NSE Nifty are lower by 9.5% and 10.6% respectively. One wonders whether the issue of poor monsoon has been over-played by the markets in recent times?

    A clear case of divergence?
    (points) Dow Nasdaq BSE NSE
    Lowest in Sep-Oct'01 8,236 1,423 2,617 861
    As on August 3rd 2002 8,313 1,280 2,976 955
    % change 0.9% -10.0% 13.7% 10.9%

    But looking from a different angle, Indian markets have actually outperformed US markets by a fair distance. As compared to the lows touched post the September event, Sensex and Nifty are higher by 13.7% and 10.9% respectively. During the same time frame, Nasdaq has fallen by 10% till August 3rd 2002 with Dow marginally higher in the positive zone. So the argument of Indian markets mirroring US indices could be questioned. Besides, majority of domestic mutual funds and FIIs have taken this opportunity to shore up portfolios.

    FIIs, in contrast to expectations, have been net buyers in the last month. But at the same time it has to be mentioned that the Indian economy and stock markets cannot function in isolation with globalisation gaining significance. So any adverse trend in the international markets could have a significant impact here as well. But, one has to judge the extent of such damage if it were to happen. Clearly, India is not a big exporter (10% of GDP) and the only identifiable sector that could suffer from slowdown in the US economy in a big way is software. But what is the weightage of tech stocks in the benchmark indices? The BSE Sensex has three tech stocks viz. HCL Tech, Satyam and Infosys with a cumulative weightage of around 13.6%. NSE Nifty, on the other hand, has a higher weightage of 18.3% for tech stocks with Infosys, Satyam, Wipro, Digital and NIIT in the group. And the weightage is actually lower, as compared to the scenario a year ago.

    Coming to the outlook for the domestic markets, as we have maintained for sometime, valuations are clearly on the compelling side. BSE Sensex is currently trading at 12x trailing 12 months earnings. Just to put things in perspective, U.S S&P 500 is estimated to be trading at a P/E multiple of 35x. However, caution is the watchword when making investment decisions, as India Inc. is still short on quality management.



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