Stock Doctor

Decline in near future?

GS-SoodTHE Sensex is fast galloping towards the 30,000 mark, riding on the global environment that is turning less negative and India shining in a world starved of growth. Flush with liquidity unleashed first by the US Fed followed by the Chinese and Japanese and now the European Central Bank (ECB), India is amongst the rarest bright spots experiencing steady rise in growth rate, relative currency stability with steadily increasing forex reserve, declining inflation and interest rates, moderating fiscal deficit, strong reforms push leading to a decisive shift in the policies aimed at giving a boost to public investment-driven macro stabilisation and a potential sovereign rating upgrade. All this has tremendously increased its attractiveness for investors across the world.

The market is in a happy mood with a further push given by the earlier-than-expected rate cut of 25 basis points announced by the Reserve Bank of India (RBI) and more cuts expected in the near future, the IMF prediction that India’s growth rate will soon surpass that of China, Indian victories in global economic conferences and Barack Obama’s visit to India.

But the future hinges on certain key questions that include whether the Union Budget will give clear signals on the policy front that meet the expectations of the market; whether corporate earnings begin to improve, since the Q3 results declared so far have not been very encouraging; whether the US will begin to increase interest rates anytime soon since the markets earlier reacted with heightened volatility on such news; whether global oil prices will remain low since low commodity prices have been a big positive for India; and whether the RBI will continue with its rate
cut cycle since the early indications of rising food prices have started coming in again.

The current Sensex PE of around 20 (based on trailing 12-months Sensex EPS) indicates that valuations have become more expensive, especially in view of the fact that some leading brokerage houses have lowered the expected Sensex EPS for the current year, given the results for the quarter ended December 2014 not meeting expectations due to various factors—both domestic and global. Since a greater part of the Sensex has rallied on hope, any further upside has to be supported by earnings upgrade. Though the long-term story remains intact due to the Indian economy being largely insulated from global shocks, a near time correction is not ruled out since considerable upside has already been priced in and the world is likely to witness fierce currency wars. Investors may, therefore, book profits in stocks that have run up a lot ahead of their fundamentals and may keep some cash aside to take advantage of any market decline that may occur in the near future.

VOL. 8 | ISSUE 11 | FEB 2015

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