Is it time to buy Indian equities?

Don't be fooled by the short bursts of buying, they might not last

Equities have fallen by nearly six per cent over the past couple of days alone, as the rupee continues to make new life-time lows. The market’s price/book ratio is five per cent from its bottom decile, from where it is rather difficult to lose money, believe equity strategists. The price/book ratio is nothing but market price of shares divided by the book value of its equity. This suggests the share prices have been beaten down to near its book value, suggesting a market can see buying from these levels.

Morgan Stanley says its proprietary market timing indicator has reached December 2011 levels, the second lowest point for Indian benchmarks after the December 2008 levels. In the past 20 years, markets have crashed to these levels only twice — 2008 and 2011. The markets have fallen by nearly six per cent over the past few trading sessions alone, on rupee concerns. On Friday, equities fell by four per cent, the third largest one-day fall in four years. Bank of America Merrill Lynch’s Jyotivardhan Jaipuria believes a large part of it was reversal of the gains of the previous few days. Overall, for the week the market fell only one per cent — not really a massive fall.

So, is it time to buy Indian equities?

The macro economic situation remains challenging for India but that is not the only risk to Indian equities. For starters, these rallies will come, as the government fires salvos from time to time to prevent the currency from overshooting, but this does not mean the market is out of the woods. The rate cycle suggests a tightening bias, which is likely to continue. Scotia Bank’s forex strategists say the strength of selling across Asia suggests market panic as credit gets hit and equities tumble. The rupee’s weakness is pushing bond yields to really high levels, “which indicates a crisis of confidence in the country ability to navigate through the current rough financial waters, also reflected in the spiking CDS (credit default swap) yields for state-owned banks,” says Sacha Tihanyi, senior currency strategist at Scotia Bank.

Jaipuria says his analysis of past major falls indicates a mixed trend. “Only in 54 per cent of the instances have markets given a positive return over the next one month. Tactically, all of Bank of America Merrill Lynch’s indicators suggest it is better to wait for a further correction or some signs of stability in the currency before buying India.”

Morgan Stanley’s strategists believe the most positive indicator for the market is the state of downward earnings revisions – which has reached a buy level. The brokerage goes on to say: “From a macro perspective, it is all about when short rates retract, which is hinged to US yields – not a pleasant situation for equity investors. Policy makers can trigger rallies from time to time by either resorting to subsidy reduction (steep hike in diesel prices) and/or raising foreign capital. The markets could also respond to better growth trends in China or stabilisation in emerging markets – however, these are unlikely to create a new bull run.”