The global turmoil has pushed Indian stock indices to levels unthinkable. Is there more pain ahead or is it time to buy? Three experts weigh in.

International credit markets are in a crisis and the stock markets have been shaky. Nobody is in a position to react to the big macro issues such as where the dollar is going, what is the likely GDP growth of US or China, and so on. For every smart person on one side of the question, there is another smart person on the other side.

The Indian financial markets have also been witnessing sustained volatility and clearly global cues are the deciding factor, in the absence of any strong domestic positive news. The US economy and its future course will be a critical factor in assessing the FII mood and market sentiments, going ahead.

As far as the valuations are concerned although the Indian markets are now trading at 14-15x FY09E, and a large part of the froth generated is now out of the system, the sustainability of any upward move in the market clearly depends on global factors.

I feel that the markets are trading closer to fair fundamental value but a minor down-move is not ruled out in the short term. One key deciding factor for the Indian markets will be FII liquidity, which seems to have completely dried up and unless this revives substantially way, we may continue to see volatile and choppy markets for another 3-4 months, followed by a noticeable recovery that could start from September ’08 onwards. However, even this will be subject to the forthcoming general elections, which now look scheduled early.

As mentioned earlier, the full effects of a global meltdown are not yet fully factored in by the markets. Any fresh adverse news on subprime crisis, and slower US economic growth will continue to have a negative impact and will be a cause of concern for emerging markets like India, where one could see redemption pressure from FIIs to fund their subprime losses in other markets.

Clearly, retail investors should look at the SIPs (systematic investment plans) of mutual funds as the right investment option if they do not have the ability and the capacity to take risk directly. Equity as an asset class will definitely bounce back and offer significantly better returns over the next two-to-three year horizon. With elections looming near the corner, the markets will continue to remain choppy and volatile and this may keep investors away from the markets.

Nevertheless, this is an excellent time for an investor to build a quality portfolio of stocks because prices of almost all blue chip stocks have come off by almost 50% and hence returns from these levels over the next two to three years will be a significant for any retail investors. However, they will have to be patient and have the conviction in their investment decisions and take a long-term call on the markets without looking at the short-term aspects. It should be very clearly understood that the India story continues to remain strong but sentiment has taken a beating due to unfavourable global developments.

Retail investors should never try and time the market; they should be in the market for a time. Other than equity, traditionally, retail investors have been investing in instruments like National Savings Certificates (NSCs), RBI bonds, post office, etc., and all these investments are for five years or more.

However, unfortunately, while investing in equity, retail investors tend to take a short-term view and look for almost instant gains. This short-term approach needs to be curbed and equity, as an asset class, needs to be considered by the investors for long-term deployment. If this approach to investment is followed, the current market scenario is ripe for retail investors to enter for making substantial long-term gains.


Next: Nilesh Shah, Dy Managing Director, ICICI Prudential AMC

Equity markets are down by more than 25% from their top, to the shock of many. Certain unanticipated events have resulted in this fall, contrary to the expectation at the beginning of the year. The subprime crisis in the United States has resulted in the drying of liquidity chasing momentum around the world. The Indian market is not an exception.

While central banks around the world, led by US Federal Reserve, are cutting interest rates or providing liquidity to avert a major credit crunch, it has not yielded the desired impact till now. India is the least impacted by subprime related issues due to our low exports-to-GDP ratio and conservative financial regulation. Global investors will surely notice this once the dust settles down on the subprime crisis.

India’s economic fundamentals are in place. The Budget has given a boost to the consumption sector by cutting taxes and writing off farm loans. The ongoing capacity expansion cycle is also likely to sustain through domestic savings and investment rate of more than 35% plus.

The Reserve Bank of India (RBI) has very wisely created a liquidity buffer of more than $100 billion in MSS, CRR and WMA balances to fund credit requirement to sustain rapid economic growth. Interest rates are stable and inflation, though a bit of a concern are well managed by the RBI. Corporate profitability growth will, however, certainly slow down in FY 2009 but that is already priced in equity markets to a reasonable extent.

The equity market is volatile due to the event-risks rather than fundamental concerns; the stress in the global financial system is putting pressure on FIIs who influence our market to a great extent. Uncertainty on the farm debt write off is also adversely impacting the markets. In April ’08 all eyes will be fixed on the credit policy. If the RBI cuts interest rates (which we do not think is likely after the growth oriented budget) then the market will get supported.

In May, the focus will be on the Monsoon forecast. In June - July, may be the talks of election and subsequent impact on economic policies will keep the market guessing. All these unpredictable events are pushing sellers to sell aggressively and buyers to trade cautiously in the market resulting in a sharp fall. The market is facing a crisis of confidence rather than shortage of cash.

We estimate sensex EPS to be Rs 1,000 for FY09 and about Rs 1,200 plus for FY10. By January 09, when we will be ready to discount FY10 earnings, the sensex could be trading at under 12 times one year forward earning taking 2,000 points for embedded value for the insurance business and gas reserves in the sensex companies. That shows the kind of potential the market has from current levels once we disengage ourselves from the current turmoil.

I will recommend investors who have invested into the market to hold tight and bear the pain. For fresh investment I will recommend investors to grab opportunities that may be available in the market around current levels in the next few months. Investors should also not expect recovery to be fast and V shape. That kind of fairy tale would happen only if all the events turn positive. While investing also do not put all the money at one go.

The markets are volatile and short on confidence right now. There are going to be some events on the way whose outcome can impact the market significantly. It is equally important that investors do not chase prices on their way up. Expect market oscillation to give you an opportunity to enter at appropriate levels. Most importantly have faith in Indian growth story which has lot of way to go notwithstanding current turmoil.


Next: Ishtaj Rahman, Executive Director, Baer Capital Partners

Given the volatility and recent declines witnessed in the Indian equity markets, this is surely a question on most investors’ minds. When attempting to arrive at an answer, one must assess what factors have driven the correction, and evaluate what aspects may, going forward, benefit or hinder the market.

From a fundamental perspective, the market is underpinned by strong growth expectations. Domestic demand continues to prove robust across several sectors, while the Indian economy, as is widely recognised, is less export driven than many of its emerging market peers, thus arguably making it less susceptible to a global slowdown. In addition, given that many Indian companies are in fact in the business of reducing costs for their foreign clients, an argument can be made that a global slowdown may in fact prove a boon for India’s export-oriented firms.

From a technical perspective the picture is somewhat different. A significant amount of capital invested in the Indian market was driven not by fundamental drivers, but rather to take advantage of strategies such as cash/futures arbitrage.

These strategies have come under pressure as the upward momentum has waned and the rupee has weakened against currencies such as the yen. The reduction in profitability of such strategies has led to an unwinding of trades by the participants and a wholesale reduction of leverage in the system. If one examines the current open interest in the derivative market the levels are fairly similar to those of May 2006 when the market also corrected by approximately 14%.

There is one difference though. The market did take a couple of months to recover after the May 2006 drawdown, but it was against a backdrop of a strengthening rupee which undoubtedly played a role in attracting technically-driven monies back into the market. Today, the case for a strong rupee is much more tenuous, with the currency in fact poised for further weakening depending on the actions of the RBI. As such, the impact of this technically-driven capital on valuations is likely to be far more muted, at least in the near term.

From a political standpoint, there is a growing belief that despite this being an election year, any changes should not derail the economic reform processes in place nor negatively impact the markets. The probability of a coalition government extending its tenure is almost assured. If the Left is absent in the new structure, the market will regard this as a positive; if the Left is present this has already been priced in. So, it looks unlikely that there will be negative surprises on the political front.

In the recent Budget there were quite a few “populist” measures such as the $15 billion debt waiver package for farmers. The FM is also proposing about $10 billion in salary revisions for certain public sector employees. The last time when pay revisions occurred in 1997, there was a significant positive impact to GDP. Whilst growth may not have been the primary motivation behind measures such as these unveiled in the recent Budget, there is no reason to believe that they will not have a similarly positive impact as they have had in the past.

Where does it leave one with respect to calling a bottom in the market? In essence, a lot of the negative sentiment has been priced in and the overvaluation corrected. This does not mean that we will not witness further declines, especially if global sentiment continues to deteriorate and risk aversion becomes more acute. However, the risk-reward trade-off is increasingly looking skewed in the investors’ favour.

The impact of positive news on the market should outweigh that of further negative news given where the market is currently trading. The market could very well end up trading in a range for several months, but further declines of the magnitude we have witnessed are unlikely. What is clear is that for the foreseeable future any price appreciation will likely be driven by earnings growth as opposed to P/E expansion.