The major part of the correction likely in the Indian stock market has already happened, but positive catalysts such as reforms and governance are needed to bring back foreign investors, says V Anantha Nageswaran, the global chief investment officer of Switzerland-headquartered Bank Julius Baer.
After losing nearly 15 per cent since the start of this year, the Bombay Stock Exchange benchmark, the Sensex, has recovered about 837 points, or five per cent, in the past four trading sessions. Today, the 30-stock index closed at 18,300, up 27 points, or 0.15 per cent.
“We feel the bulk of the correction is behind us. However, the anticipated oversold rally has taken place, and, in fact, might have been stronger than warranted,” Singapore-based Nageswaran said in an e-mail interview. “The Indian stock market is going to be range-bound, rather than breaking out to higher levels, from here on.”
Concerns over high inflation and rising interest rates remained, he said.
To curb inflation, India’s central bank has raised rates seven times since March 2010. Inflation, as measured by the wholesale price index, eased to 8.2 per cent in January from 8.4 per cent in December, a finance ministry statement on Monday showed.
Economists at Goldman Sachs expect the Reserve Bank of India to raise policy rates by 25 basis points in its next policy meeting on March 17 and by a cumulative 100 bps in calendar year 2011.
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According to Nageswaran, whose firm oversees $172 bn assets, the Union Budget later this month is significant for the Indian stock market’s short-term direction. “At this stage, some positive catalysts in terms of reforms and governance would be required to bring foreign investors back into the market,” he said.
Foreign institutional investors, which poured in close to $30 bn (Rs 1.36 lakh crore) in the Indian stock market in 2010, have pulled out $1.57 bn (Rs 7,150 crore) in this year so far, show data with the Securities and Exchange Board of India.
Buoyed by the improved outlook of developed economies, investors abroad have been reallocating money to developed markets from emerging markets like India in recent weeks. “The recent conviction is that growth in the developed world — the US and Europe — is gaining in strength. That, too, puts a brake on the return of inflows back into the emerging markets,” Nageswaran said.
Despite the sharp correction, Indian valuations were not cheap, Nageswaran said. “Forward earnings-based measures of valuation are misleading, since they are based on certain assumptions on economic growth, pricing power of corporations, global growth, etc,” he said.
Based on Wednesday’s close, the forward price-to-earnings (P/E) ratio for the Sensex is 14.39. The long-term average P/E ratio for the index is around 15. Several market experts say the present consensus Sensex earnings estimate for 2011-12 is high and there is a possibility of downgrades in the coming quarters.