Valuations may be reasonable, but a shortage of liquidity and fear will keep investors away.
With the BSE Sensex at 11,801, the Indian stock market is now no longer expensive; after a fall of over 40 per cent since the start of 2008, the Sensex trades at just under 12 times estimated FY09 earnings and that’s well below the 18 year average of 15. 6 times.
| ASIA: BATTERED | |||
| Oct 6, 2008 | Change (ytd %) | PE (X) | |
| Shanghai comp | 2173.74 | -58.69 | 16.92 |
| Sensex | 11801.70 | -41.83 | 11.98 |
| Hang Seng | 16803.76 | -39.58 | 10.24 |
| Straits Times | 2168.32 | -37.43 | 6.96 |
| Taiwan Taiex | 5505.70 | -35.27 | 9.22 |
| Kospi | 1358.75 | -28.38 | 10.79 |
| * Source Bloomberg | |||
Regional markets such as Korea and Taiwan are cheaper at 11 times and 9 times respectively. While this would have been a good time for investors to start some bottom fishing, not too much of that is likely to happen. Till there is some semblance of stability in the US financial system, the global stock markets will continue to stay weak and the Indian market can only mirror that sentiment.
That’s bad news for the Indian market which has thrived on portfolio inflows as also loans, private equity and foreign direct investments. Indeed, capital inflows into India, which increased tenfold between 2002 and 2007 and were responsible for fuelling economic growth, are estimated to be slowing down. One estimate says they have come off to $30-35 billion on an annualised basis between April-August 2008 compared with $108 billion in the year to March 2008.
These flows, however, have been pretty much in line with flows into other emerging markets. Which is why even though the Indian economy will grow at a much more robust pace than any other in the region, except for China perhaps, it’s unlikely that fund managers will bet more money on India than they have in the past. Fewer loans for corporates will hurt liquidity and keep interest rates high. And until money managers are willing to take on more risk globally, it’s unlikely they will start shopping seriously for stocks in India.
As for domestic liquidity, mutual funds haven’t seen any major redemptions yet though they’re not exactly inundated with more money. In fact, with interest rates still high and money not easily accessible, it wouldn’t be surprising if investors, particularly high net worth individuals, pulled out money simply to meet financial commitments.
Also, some investors will be nervous enough to want to keep their money in safer bank deposits. The bull rally which took the Sensex to 21,200 levels was driven almost entirely by liquidity; the markets then were hopelessly overpriced. Now that valuations are saner, sadly there’s less money to buy stocks.
