First the credit crisis in the US, then came the sovereign issues in Europe. This week came the geopolitical issue in South Korea and back home we are yet counting the number of scams. Uncertainty is only getting higher…
For those of us who thought the credit crisis in the US was the single-biggest factor to worry about, we have been completely surprised on this one!
The US economy is yet to recover from the great recession that hit in 2008. We've had QE1 and now QE2, but the economy is yet to post a strong comeback. Interest rates are close to all-time lows and are expected to be low for the immediate future for sure. The sovereign debts of Portugal, Ireland, Greece, Spain and their grim fiscal situation have kept markets worried as well.
Back home, we are counting the number of scams and trying to gauge their exact intensity.
It is thus not surprising to see the markets, which have been on the rise since May this year, give up some of the gains recently. After making a high of 6,338 on Mahurat day, Nifty has fallen 8.5 per cent to current levels of around 5,800. We have been maintaining for a while now at Edelweiss that it is liquidity that is driving the markets for the past few months. We've had record FII inflows in the calendar year 2010 of over $20 billion and with the sentiment now weakening, we are seeing the markets correct and inflows declining.
From here on we expect the markets to consolidate in the broad range of 5,500-6,300 till March, 2011, while it seems more plausible that the negative near-term sentiment takes us to the lower end of 5,500 first, which is roughly 5 per cent from current levels. This would mean a time wise correction for our markets so that the valuations would again look cheaper after we have delivered on this year's growth. We expect earnings for the BSE Sensex for 2010-11 and 2011-12 at Rs 1,076 and Rs 1,286, respectively, which translates into a PE multiple of 18 and 15, respectively. Investors could use these uncertain times to invest in good companies with a medium-term perspective. We like sectors like consumer discretionary, especially autos given their secular growth and moderate valuations. The sectors we don't like currently include cement and telecom. Over-capacities coupled with high valuations for front-liners are some reasons we don't like cement for, and increasing competitive pressures with the advent of mobile number portability (MNP) would keep profits of telecom companies under pressure.
The author is Head Retail Broking, Edelweiss Securities
