Valuations not tempting enough

Even at a forward price-earnings multiple of less than 15 times for the Sensex, investors aren't buying; their fears may be justified.

Thursday's closing Sensex of 15,357 is way higher than the August low of 13,989 but what a difference there is in the market's mood !

At that time, the Sensex bounced back smartly and even before the month was over, the market had recovered about 1400 points to trade over 15,000 levels.

This time around, the bears seem to be hammering away ,without any fear, even though the BSE Sensex now trades at under 15 times estimated FY09 earnings. They may well be right because this time around, there is a full-blown financial crisis in the US market that threatens to upset these earnings estimates and consequently the valuations.

Analysts say that if the US slips into a recession, they would knock off about Rs 125 from the Sensex's FY09 earnings.

That means the earnings in FY09 would show a growth of just 9 per cent over those of FY08. Of course, the rest of corporate India should grow at a much faster clip.

However, the FY09 estimates, whether for the Sensex or for other companies, may not have factored in all the problems at home, many of which are just coming to light.

To begin with, there could well be some nasty surprises in the fourth quarter results; with their stocks already beaten down, companies may use this as an opportunity to disclose weaknesses in the numbers.

Moreover, the economy appears to be slowing down and to make matters worse oil prices are rising. That means inflation could stay high and interest rates too.

The poor growth in retail credit, compared with previous years, is already an indication that consumer spending is falling; the worry now is that the investment spending too could slow down though given the strong order books with capital goods firms, a big deceleration in capital expenditure seems unlikely.

However, the sentiment is so bearish weak, it would seem that investors are now willing to believe the worst.

That's probably why, even at these multiples, they aren't able to muster up the courage to buy. For sure, it's not a basement bargain, the Sensex has traded at lower multiples, but the sell-off has left investors badly hurt.

Foreign institutional investors have their own problems; many of them are trying to book profits where they can and the strengthening of the yen has resulted in some unwinding of the carry trade.

Between January and now they have sold about Rs 13,800 crore worth of stock.

When they're back in business, they're likely to hit other emerging markets that have also been battered and are, therefore, cheaper than India before they make a comeback here.

Domestic mutual funds have started seeing some redemptions: a CRISIL report says the industry's average AUM (including fund of funds) dipped in February.

While February saw some inflows from new fund offerings, that would most certainly not be the case in March.

With the markets coming off, it wouldn't be surprising if insurance firms, which now contribute a significant amount to domestic liquidity, see lower inflows, given that nearly 90 per cent of the products sold are unit-linked investment plans.

As happens almost everytime, small and mid-cap indices which tend to outperform during rallies underperform on the way down.

The CNX Nifty Junior index, for instance, had hit a high of 13,020 in early January, to post a rise of over 65 per cent, compared with a 53 per cent rise in the Nifty.

In the recent correction, it has lost 39 per cent versus a 26 per cent fall for the Nifty. Similarly, the CNX Midcap Index which had risen nearly 75 per cent, going all the way to 9655 in January, has given up a good part of the gains losing 34.6 per cent from its peak.