The markets may not have broken the July low of 12,514, but the BSE Sensex today nearly got there, dipping 705 points in intra-day trades to hit 12,558. Understandably investors are still nervous, especially with the turmoil in the US financial services space and the weakness in Asia, Brazil and Russia.
After a 33 per cent fall in the Sensex since the start of 2008, valuations are now much more attractive than they were even a month back; at 13,315, the Sensex now trades at a price-earnings multiple of just under 13 times estimated FY09 earnings.
That’s about a 22 per cent discount to the 18-year average of 15.6 times and about 50 per cent off from the peak. So, from a historical perspective, India is no longer an expensive market. However, it’s still more expensive than other Asian markets: Korea trades at 11 times and Taiwan at 9 times.
That’s one reason money may flow into other markets. The other reason is that corporate earnings could slow down more than what has been priced in by the market.
After a 25-30 per cent rise in the last few years, earnings are now estimated to grow by 15-18 per cent for the broader universe of companies. That could still be a challenge.
The macroeconomic situation looks better than it did last month simply because oil prices have cooled off about 40 per cent from their highs and that reduces the strain on the fiscal deficit. Moreover, prices of other commodities such as aluminium and steel too have come off.
However, the rupee has depreciated by about 16 per cent this year and about 6 per cent over the past two months and while that will help net exporters, it will mean some pain for those repaying foreign currency loans. Moreover, interest rates remain high and companies will not have easy access to credit. So financing investment projects will be expensive.
If capital expenditure is put off, corporate profits will surely suffer.