Market valuations on the higher side
12/6/2010 3:14 PM Monday
The valuations in the Indian markets are on the higher side. Thus, the earnings growth in the country has to be greater and more sustainable than what we see elsewhere in the world. This is needed to maintain the level of fund flow that we have witnessed otherwise we may see some ebbing of the same. There is no doubt that India is a growing market and there will be a greater appetite for investment in the years to come. It is just that the rate of increase in valuations and the performance pace set in the recent past cannot continue indefinitely. So, the market will have to take a breather for some time till the earnings growth catches up or valuations in other emerging countries improve. One cannot have a total disconnect between one market and the other when the corporations that we are dealing with are global and no company operates in isolation in one particular country.
In the recent past, we have concluded the second quarter earnings season for FY11. The results are mixed and some firms as well as sectors are facing difficulties as their earnings were not as per the expectations. These things need to be closely monitored in the coming quarters as not all companies and sectors were able to translate the high GDP growth into a surge in earnings. For example, the telecom sector was under the earnings pressure while the banking sector had unbelievable higher provisioning that resulted in a muted earnings growth. Currently, a lot of IPOs and FPOs from the government are hitting the market. Therefore, we feel that the fiscal deficit will be on the lower side as the fund flow is on the rise. The government has raised a handsome sum of money through the 3G auction as well as in the 2G space. It is visible that the companies may have to cough up additional money. Also, it has been a good time for the exchequer to rake in money. However, it must be remembered that these avenues are not a continuous source of funding because money from 3G can be raised one time and companies can be asked to pay penalty for the 2G spectrum once.
We are passing through a period where inflation will be on the higher side globally. The reason behind it is the excess money that has been pumped in throughout the Central Banks worldwide. Therefore, with more money in the hands of the people, inflation is likely to head north as is the case in China and the UK. We are in an era of quantitative devaluation and easing as well as money pumping. Even though inflation is high, the possibility of interest rates rising is dim because we live in a somewhat open economy on the capital front. Today, when the interest rates are close to zero in the developed world, we cannot have high interest rates in isolation. When larger corporates have access to capital markets overseas, a lot of fund raising activity may move abroad either in the form of ECBs or bond issues. Therefore, I do not see interest rates heading northwards from this point.
Speaking of Indian markets, we are bullish on certain sectors like FMCG over the coming years. At present, valuations have moved higher and one is not getting enough opportunities to buy these stocks. On the domestic front, we maintain our bullish stance on pharmaceuticals. The financial sector will continue being on the positive side. At present, our advice to investors will be to go on a bottom up stock picking approach and look at all companies based on their merits. Trading should be done after considering the macro-economic factors like political turmoils, etc. Investing is like partnering in a company and the things that really matter are the firm’s prospects and the valuation attached to it.
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