Indian Markets - Waiting For A Global Cue

SONAM UDASI - Head Research
IDBI Capital Market Services

India forms a part of the global village. If we look at the current market scenario, it looks like the environment at present is challenging. There is a global risk aversion, and investors may stay away from equities, which are considered riskier assets in the shorter term. India is surely facing some headwinds, despite being better placed economically as compared to Europe and USA. For the global investors, the emerging markets as a whole appear to be the same. There are no affinities that can be seen by them when they look at India or China as an investment destination. My own sense is that we have seen a large correction in the global markets in this year. The Indian markets are trading at a P/E of 12x, but at the same time we can see that the Chinese markets are trading at 9x, which clearly sends across a message that all the other markets in the emerging pack have been battered too. 

India may have been an under-performer as compared to the other markets, but we have outperformed in 2010. India certainly scores in one of the most important areas – we are one of the largest consuming populations in the world and secondly, unlike China, we are not dependent on exports, which forms 20 to 24 per cent of the GDP. Moreover, our exports are more of services, and not manufactured goods. So the question is, where does India stand at present? The answer is that we will sustain a seven per cent GDP growth in the worst case scenario, and if someone has to look at the depth of the market, then we certainly believe that India has a long way to go.

We are almost looking forward to the Q2 FY12 results. However, at present, the market does not seem to be reading too much into the results’ expectations. Various projections by the broking fraternity suggest that they have kept their expectations from the results extremely low. The raw material cycle is not favourable in this quarter, and there are headwinds on the realty and infrastructure side. The order book is low. In the present scenario, it can be said for the interest-sensitive sectors that there will be some pressure on the NIMs and on the asset quality, but if we look at the valuations, they certainly reflect a better picture, as the prices have halved from their peak levels.

We are currently witnessing a high interest rate scenario. Looking at the trend of the commodity prices over the last couple of weeks, it can be said that the interest rates may have peaked and the RBI may take a pause. It may go for a 25 bps hike in October, but that will be the last one. On the global front, it is very difficult to take a call on the US or European markets. What we can do is extrapolate from what the opinion makers in those countries are referring to. My own belief is that sooner or later, there will be capital controls in Europe in some form or the other. In other words, it can be said that the money flow from Europe will be difficult. Also, in the entire EU episode, we forget that the US itself is facing lot of challenges.