INVESTMENT MARKETS IN “WAIT &
WATCH” MODE
(DT 12.05.08)
Vishnu. S. Jarugumilli
98450-77374
This is a
follow up piece to our article “2008- a dismal year ahead?” written on Jan 19th
2008, on the prospects of India’s investment markets. Our readers will recall
our predictions about the prospects of
1)
Stock markets: We predicated they will significantly fall due to their own
weight of over-valuations. Our timing could not have been better. Stock markets
actually crashed on the 22nd and 23rd Jan, never to scale
the past heights till date.
2)
Real estate: We said was in a flux and does not offer any major gains this year.
We stand vindicated till now.
3)
And Gold: Our prediction for the yellow metal was positive. Gold was around Rs
10,500 in the middle of Jan. It shot up to Rs 13,000/- and is now hovering
around the Rs 11,700/- mark.
That said, what are the
prospects now for the rest of the year? We examine each of them today and see how they are likely to
fare. But let me say once again that the outlook is based on the scenario as of
now and any major surprise events locally or globally, will have unforeseen
impacts, both positive and negative.
STOCK MARKETS:
Stock markets are a factor of three important contributors, namely valuations,
liquidity and corporate earnings.
VALUATIONS: At the
present level of 16700 on the Sensex the valuations for BSE are in the range of
16-17 times FY 09 earnings. These are acceptable levels when seen from the prism
of 8% GDP growth, 20% earnings growth for the corporate sector and keeping in
mind the generally bullish INDIA STORY. However, there are a couple of
questions. 1) Why should 16-17 times PE be taken as a sacrosanct level and will
there be a case for derating of PE, particularly if markets across globe head
for derating. 2) 16-17 times is actually a comfort level from the high of 20-21
times that we scaled in Jan. So are actually markets fooling themselves by
looking at it from the viewpoint of how much have they fallen rather than trying
to find it’s intrinsic and true worth?
LIQUIDITY: This
happens to be the most unpredictable of all. The sub-prime crisis in the US and
the resultant losses to investments banks
is a much written story. We will not
reiterate that. There is another new story brewing across globe which
promises to be more riveting and threatens to deliver much more by way of nasty
surprises. AND IT GOES LIKE THIS.
Growth and
inflation have a peculiar and unpredictable relationship. Inflation does not
usually rise in periods of slow growth. But now, both these are playing hand in
hand and are co-creating their own dangerous orbits. The US has just been
witness to this phenomenon and the rest are following suit. The Bernankes and
the Reddys of the world have no answer to this and this is not a statement on
their capabilities. There is a scramble to find some villains. And Futures
trading in commodities is getting the most nominations. There is an argument
that commodity prices have risen disproportionately to their consumption growth
and Crude and gold are prominent examples. Agricultural commodities are
politically sensitive and can deliver a Pokhran in every country. Many
countries are beginning to ban futures in sensitive commodities and even India
did it in a select few last week.
No one
knows if this helps but governments will at least need to be seen as doing
something. What if nothing happens on the rising inflation for a couple of more
months? The likely scenario is that there will be severe curbs on futures in
many commodities. We all know there is huge money invested globally in
commodities and this is where the next sub-prime may happen. And this time it is
not just US institutions that will take a hit but many FIs across the globe. If
that truly happens, GOD SAVE EQUITY
MARKETS.
The silver lining is
that this will take at least 6 months to play out and there is time to react
depending on which way the wind is blowing.
CORPORATE EARNINGS:
Q4 results in India were more or less satisfactory including IT bellwethers.
Telecom was fabulous and even auto sales in April were showing signs of
recovery. The only bug bear is inflation. The jury is still out on this. 2nd
and 3rd weeks of July will be interesting when Q1 results are out.
Till such time it is even-Stevens.
REAL ESTATE:
There is no denying the fact that while transactions have fallen 30-40%, prices
have not. While this seems
contradictory, in reality it is not. Let us not forget that, during the last 12
months, all prominent builders have raised huge money either from public or
through private equity. If you take Bangalore’s case, while Purva, Sobha and
Brigade have gone public, Mantri, Nitesh and Prestige have absorbed private
equity. Builders are not short on working capital and have the capacity to tide
over short term crisis. Land banks have been accumulated over time at lesser
costs. Prices will hold firm for a while and if bad times continue, softening
will happen after 6 months. If demand picks up meanwhile, prices will move on to
the next level.
GOLD:
Gold is usually seen as a hedging mechanism against falling Dollar. But like
currency markets, Gold also is likely to witness great volatility. Both spikes
and corrections will be swift and sharp. But the general bias is still upwards
and gold can be considered safe even at the present levels of Rs11700.