The market brushes aside concerns over a weak monsoon as liquidity drives up valuations
The Street has been fairly bullish on the market for some time even though valuations appeared stretched because of an abundance of liquidity. Of late, though, fund flows into Asia have been tapering off after the huge inflows of $3.6 billion per month between April and July.
Inflows in the week to September 2, 2009, were $68 million, not even 10 per cent of average inflows per week between March and July. In fact, there were a couple of weeks in August during which there were outflows. But India has seen nine consecutive weeks — so what if the amounts are at about a third of the weekly average so far in 2009 — of $51 million. Since the start of 2009, foreign institutional investors have bought equities worth more than $8 billion.
It’s a fact that Asian economies (ex-Japan) are recovering fast and real gross domestic product in many of these is expected to grow sequentially during 2009 with the momentum being carried forward to 2010. But Asian central bankers are expected to start tightening liquidity, albeit only gradually, since there are lingering concerns about how sustainable the growth is.
In India, no official tightening is expected immediately but less support from the central bank means there could be pressure on bond yields as headline consumer price inflation moves into double digits. It’s possible that long-bond yields could go up by 50-100 basis points by early 2010.
That’s about the time when some strategists expect the Indian market to correct to around 13,000 levels. That, however, could be a temporary phase with the markets bouncing back as the economy gathers further momentum after a relatively weak 2009-10.
For now, the momentum appear to be strong even if the Sensex trades at a price/earnings (P/E) multiple of around 17.5 times estimated 2009-10 earnings and 16 times 12 months forward earnings — the ten-year mean is around 14 times.
The good macro numbers, such as the index for industrial production, are expected to prompt earnings upgrades. If one looks at 2010-11 earnings, the Sensex trades at a less expensive 14.4 times. Clearly, the market seems to be brushing aside any impact of weak monsoon, a squeeze on disposable incomes because of rising inflation or higher interest rates.
