Oct 12, 2009|
Markets: Where to from here?
After a strong run during last week, Asian markets have opened this week on a mixed note. While gains are seen in China and Japan, selling pressure marks trading in Hong Kong and Korea. Volatility though remains the key undertone across these markets. Confusion whether the current nascent economic recovery will sustain going forward is the root cause of the same. High valuation of stocks is another big concern that is keeping investors on the tenterhooks.
The situation is no different for India, where valuations of stocks have reached near their pre-crisis high levels. And this is without any meaningful change in the fundamentals of corporate India. In effect, a large part of the current rally (that's on since March) can be attributed to expansion in the P/E multiples of stocks and not any real improvement in the earnings momentum.
Take for instance the average P/E (price to earnings) of the 30 BSE-Sensex companies. This has moved from a low of 12 times in March to the current levels of around 21 times trailing 12-monthe earnings.
It is interesting to hear market bulls talk about how distorted it is to be using trailing multiples that include 'slowdown earnings'. They are also making the case of a much improved corporate performance in the September quarter. But this seems a bit far-fetched.
The earnings outlook is far from rosy. While June quarter performance was driven by operational leverage in the form lower raw material and interest cost, we do not see this sustaining going forward. Ultimately companies have to grow sales to grow their profits, which seems tougher to achieve in the current environment, at least if we are to go by our recent interactions with companies across sectors.
Companies are indicating that they are yet to see any meaningful improvement in demand for their products and services. While infrastructure companies are amongst those that sound the most positive these days, even they are not denying that it is government and not private sector spending that is propping up their order books. Industrial capex is yet to show any signs of revival and services companies are yet to restart adding to their manpower base. All, it seems, are keeping their fingers crossed for more sustainable signs of improvement in the macro picture.
But stock markets continue to move up, duly backed largely by foreign money that is seeking greener pastures in emerging markets. FIIs, for instance, have already invested around US$ 12 bn in Indian stocks so far this year.
While we are no good forecasters of the markets' short term movement, what we can clearly see is that greed is gradually making its comeback to the markets. Maybe even you might be putting in some surplus money into stocks now with a view to not miss out on the rally. We believe that stocks have risen too much, too fast, and now a valid case for caution can be made.
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