Further fall of markets not ruled out
THE markets have fallen by around 10% from their recent highs, making investors take a re-look at the valuations that should have by now become reasonable enough. Unfortunately, the markets may still have some more downside left in view of the fact that, despite PE ratio declining substantially, the valuations still may not be considered compelling enough or competitive when compared with peers, due to likely moderation in growth rate, stubbornly high rate of inflation, rising interest rates and fiscal deficit, and likely moderation in corporate earnings growth due to rising costs and moderation in demand.
The resurfacing of Eurozone debt problems with Fitch cutting Greece’s credit rating, pushing the country to jump territory, being on the verge of default, and Standard and Poor cutting the outlook for Italy from negative to stable with concerns over Belgium and Spain as well confirms the fear of the crisis spreading to the third largest economy of Eurozone. Though it may not impact our markets in a big way, it will have a direct bearing on the risk-reward equation. The markets are likely to remain volatile until QE2 (the second round of quantitative easing) comes to an end.
The domestic factors also have nothing much to cheer about. Finance Minister Pranab Mukherjee admitted that India will continue to experience inflationary pressures due to high global commodity prices and local demand-supply mismatch. Food inflation again hit a four-week high of 8.55% for the week ending May 14. With the sharp increase in prices of petrol and likely increase in prices of diesel and LPG still to be factored in, price rise may be a serious matter of concern for the markets. It also raises the chances of a further hike in interest rates by the RBI.
The high inflation has started impacting the corporate performance, as per a recent survey. Most companies reported rapid increase in labour costs, logistics expenses and raw material costs as well as in interest costs. Companies have also started experiencing lower demand for their products and services.
The recent decline in crude and other commodity prices have further sent negative signals across the markets as it is viewed as being indicative of demand destruction in the US. A further correction in commodities may bode well for India, though it is also indicative of the general perception that funds are exiting risky assets and the same may extend to equities also. However, the good thing about the Indian market is that it is not in an overbought territory. So, post 10% correction, hardly witnessed by any other market, any policy action may trigger the move up. The relative under-performance of Indian markets may therefore end soon, with the tightening cycle ending by FY11. Rate-sensitive sectors such as realty, banking and auto may give the next big push to the Sensex followed by IT, pharma and consumer goods.
THE markets have fallen by around 10% from their recent highs, making investors take a re-look at the valuations that should have by now become reasonable enough. Unfortunately, the markets may still have some more downside left in view of the fact that, despite PE ratio declining substantially, the valuations still may not be considered compelling enough or competitive when compared with peers, due to likely moderation in growth rate, stubbornly high rate of inflation, rising interest rates and fiscal deficit, and likely moderation in corporate earnings growth due to rising costs and moderation in demand.
The resurfacing of Eurozone debt problems with Fitch cutting Greece’s credit rating, pushing the country to jump territory, being on the verge of default, and Standard and Poor cutting the outlook for Italy from negative to stable with concerns over Belgium and Spain as well confirms the fear of the crisis spreading to the third largest economy of Eurozone. Though it may not impact our markets in a big way, it will have a direct bearing on the risk-reward equation. The markets are likely to remain volatile until QE2 (the second round of quantitative easing) comes to an end.
The domestic factors also have nothing much to cheer about. Finance Minister Pranab Mukherjee admitted that India will continue to experience inflationary pressures due to high global commodity prices and local demand-supply mismatch. Food inflation again hit a four-week high of 8.55% for the week ending May 14. With the sharp increase in prices of petrol and likely increase in prices of diesel and LPG still to be factored in, price rise may be a serious matter of concern for the markets. It also raises the chances of a further hike in interest rates by the RBI.
The high inflation has started impacting the corporate performance, as per a recent survey. Most companies reported rapid increase in labour costs, logistics expenses and raw material costs as well as in interest costs. Companies have also started experiencing lower demand for their products and services.
The recent decline in crude and other commodity prices have further sent negative signals across the markets as it is viewed as being indicative of demand destruction in the US. A further correction in commodities may bode well for India, though it is also indicative of the general perception that funds are exiting risky assets and the same may extend to equities also. However, the good thing about the Indian market is that it is not in an overbought territory. So, post 10% correction, hardly witnessed by any other market, any policy action may trigger the move up. The relative under-performance of Indian markets may therefore end soon, with the tightening cycle ending by FY11. Rate-sensitive sectors such as realty, banking and auto may give the next big push to the Sensex followed by IT, pharma and consumer goods.
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